Cool New Paper on the Transition from a Gift to a Market Economy

When I took his graduate class on the microeconomics of development, Chris Barrett mentioned that “Heterogeneity and the Three ‘Nons'” differentiate developing economies from industrialized economies:

  1. Heterogeneity: Heterogeneity of endowments, preferences, technologies, and abilities affect outcomes,
  2. Non-Separability: Households are both production and consumption units, and these two decision are not always separable,
  3. Non-Anonymity: Village life is not anonymous, and who one transacts with often affects the terms of exchange,
  4. Non-Market Institutions: High transactions costs often cause households not to participate in markets and to develop seemingly inefficient institutions.

In a post titled “The Transformation Process of Rural Societies,” Frankfurt-based Chilean economist Dany Jaimovich discusses a cool new paper of his which gets at #3 above, i.e., how one can move from non-anonymous to relatively more anonymous transactions:

The aim of the paper is to contribute to the empirical analysis of the process of transformation in traditional rural societies using a network perspective. A unique database on economic networks (land, labor, inputs and credit) collected in 60 villages of rural Gambia, where traditional non-monetary economic exchanges –gift economy– prevail, is used to study  the  behavior of  households involved in market transactions.

The empirical analysis is conducted at both household- and link-level … In all the econometric specifications I find support for the two main hypotheses: (i) Substitutability between internal and external exchanges, i.e. households with external economic links are less likely to be involved in economic interactions within the village; and (ii) Reciprocation  versus market, i.e. households with external economic links are less likely to be involved in reciprocated exchanges with fellow villagers.

In the paper I discuss the assumptions required for a causal interpretation of the results, basically that unobservable characteristics determining the creation of internal links affect the the formation of external links in the same direction. I argue that this is plausible, but the potential bias remains as a not fully solved issue to be addressed in future research.

This is a highly interesting, big-think type question. Indeed, I have noticed that economists and other social scientists often talk past each other because of the former’s emphasis on market economies and the latter’s emphasis on gift economies (or moral economies).

Dany gets as close as one can, I think, to bridging that gap and making sure economists and other social scientists can understand each other. His work reminds me of the work Marcel Fafchamps has been doing on market institutions (and indeed, Dany uses Marcel’s dyadic regression technique to study network links).

Dany is also one of the very few social scientists to have studied The Gambia, on which I am currently working with a former advisee of mine. More on this work of ours later.

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