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The Problem of search and deliberation in economic action: when networks really matter

Author: Rangan, Subramanian INSEAD Area: Strategy Series: Working Paper ; 98/41/SM Publisher: Fontainebleau : INSEAD, 1998.Language: EnglishDescription: 51 p.Type of document: INSEAD Working Paper Online Access: Click here Abstract: Economic sociologists have argued that social networks are a key determinant of firms' economic actions - i.e. actions oriented toward the allocation of scarce resources. Economists, on the other hand, tend to disregard social relations and emphasize the role of prices. How do we reconcile these positions? Are prices and networks substitutes or complements in explaining economic action? And more broadly, when do networks really matter? The line of generalization explored here argues that the significance of social networks in explaining patterns of allocative actions and outcomes will be greatest in those spheres of economic activity where search and deliberation are problematic. Here search refers to acts involved in identifying potential exchange partners and deliberation refers to acts involved in assessing their reliability and trustworthiness. Search grows more important the more spatially dispersed economic opportunities become, and deliberation grows more important the more costly it becomes to reverse allocative actions or their effects. When search and deliberation are important but problematic, actors tend to rely on their social networks, because, frequently, the latter can help alleviate problems of search and deliberation, and enable actors to exploit economic opportunities furnished by the price mechanism. In these instances - contrary to common perception-networks and prices operate as consistent with standard economic rationality. By implication, under circumstances of problematic search and deliberation, actors embedded in well-elaborated social networks will tend to enjoy information advantages by virtue of which they will adapt and respond more proficiently to new economic opportunities. These propositions are explored in an empirical study with controls contrasting multinational and non-multinational enterprises' international trade response to exchange rate changes.
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Economic sociologists have argued that social networks are a key determinant of firms' economic actions - i.e. actions oriented toward the allocation of scarce resources. Economists, on the other hand, tend to disregard social relations and emphasize the role of prices. How do we reconcile these positions? Are prices and networks substitutes or complements in explaining economic action? And more broadly, when do networks really matter? The line of generalization explored here argues that the significance of social networks in explaining patterns of allocative actions and outcomes will be greatest in those spheres of economic activity where search and deliberation are problematic. Here search refers to acts involved in identifying potential exchange partners and deliberation refers to acts involved in assessing their reliability and trustworthiness. Search grows more important the more spatially dispersed economic opportunities become, and deliberation grows more important the more costly it becomes to reverse allocative actions or their effects. When search and deliberation are important but problematic, actors tend to rely on their social networks, because, frequently, the latter can help alleviate problems of search and deliberation, and enable actors to exploit economic opportunities furnished by the price mechanism. In these instances - contrary to common perception-networks and prices operate as consistent with standard economic rationality. By implication, under circumstances of problematic search and deliberation, actors embedded in well-elaborated social networks will tend to enjoy information advantages by virtue of which they will adapt and respond more proficiently to new economic opportunities. These propositions are explored in an empirical study with controls contrasting multinational and non-multinational enterprises' international trade response to exchange rate changes.

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