The Limits of Equality: Insights From the Israeli Kibbutz

By Ran Abramitzky - Stanford University - 2005

ABSTRACT
The Israeli Kibbutzes, which are voluntary communities based on income equality, are puzzling since they might unravel due to moral hazard and adverse selection. Yet Kibbutzes persisted for
most of the 20th century. How did voluntary communities based on income equality persist within a capitalist environment? What level of equality can they sustain? This paper employs unique data sets at both the Kibbutz-level and the individual-level to analyze Kibbutzes’ choices of their level of income equality, their organizational form and their members’ decisions of whether to leave the Kibbutz. A wealth shock that hit Kibbutzes differentially provides the “natural experiment” that allows me to identify the determinants of the level of equality and the exit rates in each Kibbutz. The main findings are that the most productive members are more likely to leave, that common wealth is a lock-in device that makes exit costly, and that wealthier Kibbutzes are more likely to choose a higher level of income equality. All the patterns in the data are consistent with a simple model of optimal insurance under limited commitment of members to stay in their Kibbutz once their type is realized. This stands in contrast to the view of Kibbutzes as primarily ideological entities. At a broader level, the study of Kibbutzes reveals how potential moral hazard and negative selection determine contractual relationships in organizations such as partnerships and cooperatives.

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Why Personal Ties Cannot Be Bought?

By Casella & Hanaki (2006)
American Economic Review, Papers and Proceedings May 2006, p.p. 261-264

The unambiguous message of our model is that networking transmits information effectively only if its cost is low. When networking is free, it is preferred to signaling by both firms and workers almost without exception. But it is never a very precise mechanism, and if its cost is higher, firms’ hiring decisions interact with workers’ selfselection preventing endogenous improvements in precision. At high cost, signaling transmits information more accurately and supplants networking completely. We are somewhat surprised to conclude in qualified support of the sociologists’ position: networks work best when they are unintentional, and thus free by-products of people’s social life: ethnic, religious, family networks. In this case, they are extremely difficult to substitute with a market mechanism. Nor is it easy to mimic these spontaneous network through the intentional, and thus costly, creation of personal ties, because such action distorts, as opposed to favoring, the transmission of information. If ties are costly, market mechanisms are superior.

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Winners don't take all: Characterizing the competition for links on the web

By Pennock, Flake, Lawrence, Glover, and Giles (2002)

ABSTRACT
As a whole, the World Wide Web displays a striking ‘‘rich get richer’’ behavior, with a relatively small number of sites receiving a disproportionately large share of hyperlink references and traffic. However, hidden in this skewed global distribution, we discover a qualitatively different and considerably less biased link distribution among subcategories of pages—for example, among all university homepages or all newspaper homepages. Although the connectivity distribution over the entire web is close to a pure power law, we find that the distribution within specific categories is typically unimodal on a log scale, with the location of the mode, and thus the extent of the rich get richer phenomenon, varying across different categories. Similar distributions occur in many other naturally occurring networks, including research paper citations, movie actor collaborations, and United States power grid connections. A simple generative model, incorporating a mixture of preferential and uniform attachment, quantifies the degree to which the rich nodes grow richer, and how new (and poorly connected) nodes can compete. The model accurately accounts for the true connectivity distributions of category-specific web pages, the web as a whole, and other social networks.

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A classic: The diameter of the world wide web

by Albert, Jeong and Barabasi (1999)

"... we find that the average of d over all pairs of vertices follows hdi = 0.35+2.06 log(N), indicating that the web forms a small-world network"

Full article here

Power Laws, Weblogs, and Inequality

By Clay Shirky

"Diversity plus freedom of choice creates inequality, and the greater the diversity, the more extreme the inequality..."

Complete article here

Celebrity in social networks: how can we avoid the power law distribution?

By Ben Werdmuller

"In any information ecosystem, there is an observable tendency for a few sources on a topic - be they journals, websites or people - to have a massive following, a significantly smaller number to have a medium number of followers, and then a final, largest group to have a much smaller number of regular readers. This can be witnessed in the Technorati Top 100: the top 100 blogs range from around 80,900 unique links to 4,900 (quite a decrease), yet Technorati track 26.6 million sites. If the downward link trend continues across all 26.6 million, most weblogs have at most one a handful of links - and therefore a correspondingly small number of readers. I've been wondering for a while how best to verbalise this..."

complete article here

The topology of covert conflict

By Shishir Nagaraja, Ross Anderson

Abstract. Often an attacker tries to disconnect a network by destroying nodes or edges, while the defender counters using various resilience mechanisms. Examples include a music industry body attempting to close down a peer-to-peer file-sharing network; medics attempting to halt the spread of an infectious disease by selective vaccination; and a police agency trying to decapitate a terrorist organisation. Albert, Jeong and Barab´asi famously analysed the static case, and showed that vertex-order attacks are effective against scale-free networks. We extend this work to the dynamic case by developing a framework based on evolutionary game theory to explore the interaction of attack and defence strategies. We show, first, that naive defences don’t work against vertex-order attack; second, that defences based on simple redundancy don’t work much better, but that defences based on cliques work well; third, that attacks based on centrality work better against clique defences than vertex-order attacks do; and fourth, that defences based on complex strategies such as delegation plus clique resist centrality attacks better than simple clique defences. Our models thus build a bridge between network analysis and evolutionary game theory, and provide a framework for analysing defence and attack in networks where topology matters. They suggest definitions of efficiency of attack and defence, and may even explain the evolution of insurgent organisations from networks of cells to a more virtual leadership that facilitates operations rather than directing them. Finally, we draw some conclusions and present possible directions for future research.

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Rethinking public economics: the implications of rivalry and habit

By Richard Layard

The aim of public policy should be to maximise people’s happiness, suitably aggregated. This requires us to understand what actually produces happiness. In traditional economics, we simply assume that someone’s current happiness depends on their current choice-set. The larger the choice-set the happier the person. So if my choice-set increases and everyone else’s remains the same, social welfare must increase.
But this conclusion completely ignores the impact of one person’s pay rise on the welfare of his colleagues. Such interdependencies are a basic part of human experience, and a theory which ignores them is deeply misleading. In consequence some critics would have us discard the whole approach. But this is wrong. Instead we should expand our framework to take into account the full range of human experience, rather than rejecting it.

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The Persistence of Underdevelopment: Institutions, Human Capital, or Constituencies?

Nice paper, Rajan & Zingales (2006)
NBER Working Paper No. 12093
Issued in March 2006

Abstract
Why is underdevelopment so persistent? One explanation is that poor countries do not have institutions that can support growth. Because institutions (both good and bad) are persistent, underdevelopment is persistent. An alternative view is that underdevelopment comes from poor education. Neither explanation is fully satisfactory, the first because it does not explain why poor economic institutions persist even in fairly democratic but poor societies, and the second because it does not explain why poor education is so persistent. This paper tries to reconcile these two views by arguing that the underlying cause of underdevelopment is the initial distribution of factor endowments. Under certain circumstances, this leads to self-interested constituencies that, in equilibrium, perpetuate the status quo. In other words, poor education policy might well be the proximate cause of underdevelopment, but the deeper (and more long lasting cause) are the initial conditions (like the initial distribution of education) that determine political constituencies, their power, and their incentives. Though the initial conditions may well be a legacy of the colonial past, and may well create a perverse political equilibrium of stagnation, persistence does not require the presence of coercive political institutions. We present some suggestive empirical evidence. On the one hand, such an analysis offers hope that the destiny of societies is not preordained by the institutions they inherited through historical accident. On the other hand, it suggests we need to understand better how to alter factor endowments when societies may not have the internal will to do so.

Collaboration and Creativity: The Small World Problem

Uzzi & Spiro (2005). American Journal of Sociology, Sept 2005

Small world networks have received disproportionate notice in diverse
fields because of their suspected effect on system dynamics.
The authors analyzed the small world network of the creative artists
who made Broadway musicals from 1945 to 1989. Using original
arguments, new statistical methods, and tests of construct validity,
they found that the varying "small world" properties of the systemiclevel
network of these artists affected their creativity in terms of the
financial and artistic performance of the musicals they produced.
The small world network effect was parabolic; performance
increased up to a threshold, after which point the positive effects
reversed.

Economics: an emerging small world?

Goyal, van der Leij, Moraga-Gonzalez (2003)

Abstract
This paper examines the small world hypothesis. The first part of the paper presents empirical evidence on the evolution of a particular world: the world of journal publishing economists during the period 1970-2000. We find that in the 1970's the world of economics was a collection of islands, with the largest island having about 15% of the population. Two decades later, in the 1990's the world of economics was much more integrated, with the largest island covering close to half the population. At the same time, the distance between individuals on the largest island had fallen significantly. Thus we believe that economics is an an emerging small world.

What is it about the network structure that makes the world small? An exploration of the micro aspects of the network yields three findings: one, the average number of co-authors is very small but increasing; two, the distribution of co-authors is very unequal; and three, there exist a number of `stars', individuals who have a large number of co-authors (25 times the average number) most of whom do not write with each other. Thus the economics world is a set of inter-connected stars.

We take the view that individuals decide on whether to work alone or with others; this means that individual incentives should help us understand why the economics world has the structure it does. The second part of the paper develops a simple theoretical model of co-authorship. The main finding of the model is that in the presence of productivity di®erentials and a shortage of high productivity individuals, inter-connected stars will arise naturally in equilibrium. Falling costs of communication and increasing credit for joint research leads to greater co-authorship and this is consistent with the growth in the size of the giant component.

Legal Institutions and Informal Networks

By Ethan Bueno de Mesquita and Matthew Stephenson, 2006
Journal of Theoretical Politics 18(1): 40–67

ABSTRACT
The relationship between third-party contract enforcement and informal networks raises important sociological, political, and economic questions. When economic activity is embedded in social structures, what are the implications of third-party contract enforcement for the scope and nature of economic relations? What determines whether individuals rely on formal legal institutions or informal networks to sustain trade relationships? Do legal institutions erode informal networks? We develop a model in which a trade-off exists between size and sustainability of networks. By adding the possibility of feebased, enforceable contracts, we provide a theoretical explanation for the coexistence of legal contract enforcement and an informal economy. We find that legal enforcement has little effect on networks until law becomes sufficiently inexpensive, at which point small decreases in the cost of law have dramatic effects on network size and the frequency of use of the legal system.

Paper here

A Biological Model of Unions

By Michael Kremer and Benjamin A. Olken
January 16, 2006

Abstract
This paper applies principles from evolutionary biology to the study of unions. We show that unions which implement the preferred wage and organizing policies of workers will be displaced in evolutionary competition by unions that either extract less from firms, allowing them to live longer, or spend more on union organizing, or both. This implies that unions with constitutional incumbency advantages that allow leaders to depart from members’ preferences may have a selective advantage, allowing them to grow at the expense of unions lacking such provisions. Evidence from the history of American unions supports these predictions.

Paper here

Corruption Perceptions vs. Corruption Reality

By Benjamin A. Olken
NBER Working Paper No. 12428
Issued in August 2006

---- Abstract -----

This paper examines the accuracy of beliefs about corruption, using data from Indonesian villages. Specifically, I compare villagers’ stated beliefs about the likelihood of corruption in a road-building project in their village with a more objective measure of ‘missing expenditures’ in the project, which I construct by comparing the projects’ official expenditure reports with an independent estimate of the prices and quantities of inputs used in construction. I find that villagers’ beliefs do contain information about corruption in the road project, and that villagers are sophisticated enough to distinguish between corruption in the road project and other types of corruption in the village. The magnitude of their information, however, is small, in part because officials hide corruption where it is hardest for villagers to detect. This may limit the effectiveness of grass-roots monitoring of local officials. I also find evidence of systematic biases in corruption beliefs, particularly when examining the relationship between corruption and variables correlated with trust. For example, ethnically heterogeneous villages have higher perceived corruption levels but lower actual levels of missing expenditures. The findings illustrate the limitations of relying solely on corruption perceptions, whether in designing anti-corruption policies or in conducting empirical research on corruption.

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Commitment, Coercion, and Markets: The Nature and Dynamics of Institutions Supporting Exchange

By Avner Grief

ABSTRACT

Markets rest upon institutions. The development of market-based exchange relies on the support of two institutional pillars that are, in turn, shaped by the development of markets. Research in the field of new institutional economics has largely focused upon one such institutional pillar—‘contract-enforcement institutions’—that determine the range of transactions in which individuals can commit to keep their contractual obligations. Yet, markets also require institutions that constrain those with coercive power from abusing others’ property rights. These ‘coercion-constraining’ institutions influence whether individuals will bring their goods to the market in the first place.

This chapter’s discussion of market-supporting institutions is geared toward the issues we know the least about. First, the dynamics of market-supporting institutions and the implied dynamics of markets; second, the inter-relationships between the dynamics of market-supporting and political institutions where the latter comprise the rules for collective decision-making, political rights, and the legitimate use of coercive power. It argues, in particular, that neither the assertion that liberal political institutions lead to markets nor that markets lead to liberal governance are supported by theory or history. Markets and political institutions co-evolve through a dynamic inter-play between contract-enforcement and coercion-constraining institutions.

Many successful market economies have prevailed in the past; there were adequate market-supporting institutions. Early successes, such as those in the Islamic world or China, were not indicators of later development. It was the commercial expansion that began in Europe during the late medieval period that led to the development of markets that support the complex, dynamic modern economy with its wide-scale reliance on impersonal exchange. Why didn’t early success lead to subsequent market expansion? More generally, what does determine the dynamics of market expansion? Addressing these questions is a key to understanding the ‘Rise of theWest,’ the operation of market economies, and the factors that still hinder market development.

The argument advanced here is that markets can rest on different combinations of contract-enforcement and coercion-constraining institutions.

Paper here

The Economics of Social Networks

By Matthew O. Jackson

Abstract
The science of social networks is a central field of sociological study, a major application of random graph theory, and an emerging area of study by economists, statistical physicists and computer scientists. While these literatures are (slowly) becoming aware of each other, and on occasion drawing from one another, they are still largely distinct in their methods, interests, and goals. Here, my aim is to provide some perspective on the research from these literatures, with a focus on the formal modeling of social networks and the two major types of models: those based on random graphs and those based on game theoretic reasoning. I highlight some of the strengths, weaknesses, and potential synergies between these two network modeling approaches.

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