Missing Links: Formation and Decay of Economic Networks

Half of all workers are hired through personal referrals, and networks of social connections channel the flows of capital, technology, and international trade. Sociologists and economists alike recognize that economic exchange is shaped by social networks, which propagate information and facilitate trust, but each discipline brings a distinct theoretical perspective to the study of networks. Sociologists have focused on how networks shape individual behavior, economists on how individual choices shape networks. The Missing Links is a bold effort by an interdisciplinary group of scholars to synthesize sociological and economic theories of how economic networks emerge and evolve. Interweaving sophisticated theoretical models and concrete case studies, The Missing Links is both an introduction to the study of economic networks and a catalyst for further research. Economists Rachel Kranton and Deborah Minehart illustrate their field's approach to modeling network formation, showing how manufacturers form networks of suppliers in ways that maximize profits. Exemplifying the sociological approach, Ronald Burt analyzes patterns of cooperation and peer evaluations among colleagues at a financial organization. He finds that dense connections of shared acquaintances lead to more stable reputations. In the latter half of the book, contributors combine the insights of sociology and economics to explore a series of case studies. Ray Reagans, Ezra Zuckerman, and Bill McEvily investigate an R & D firm in which employees participate in overlapping collaborative teams, allowing the authors to disentangle the effects of network structure and individual human capital on team performance. Kaivan Munshi and Mark Rosenzweig examine how economic development and rising inequality in India are reshaping caste-based networks of mutual insurance and job referrals. Their study shows that people's economic decisions today are shaped both by the legacy of the caste hierarchies and by the particular incentives and constraints that each individual faces in an evolving labor market. Economic globalization is forging new connections between people in distant corners of the world, while unsettling long-standing social relations. Anyone interested in understanding the opportunities and challenges of this era of rapid change will find a highly informative guide in The Missing Links.

JAMES E. RAUCH is professor of economics at the University of California, San Diego, and a research associate at the National Bureau of Economic Research.