Network Centrality and Informal Institutions: Evidence from a Lab Experiment in the Field

While social closeness mitigates contractual incompleteness, we examine how communities can enlist third parties to improve cooperation between socially distant pairs. Network-central members may be particularly effective at this role through two channels: information and enforcement. We conduct modified trust games (with and without third parties) in 40 Indian villages to measure the effectiveness of central third parties. Assigning a punisher at the 75th percentile of the centrality distribution (versus the 25th) increases efficiency by 21%. 2/5 of the effect is attributed to information and 3/5 to enforcement. Central punishers are most valuable when senders and receivers are socially distant.