Social Networks and Corruption

Social networks, as components of social capital, are often cited as contributing to economic and political performance. This paper discusses a less felicitous effect of social networks, defined here as relationships between individuals implying obligation and easing the flow of information: their role in determining the extent and nature of corruption. The connections that make up social networks serve as both substitutes and complements for money in corrupt transactions. As substitutes, they further favor-type but discourage extortion-type corruption, while leaving those without connections to pay higher bribes than they would in the absence of social networks. As complements, they help solve a holdup problem inherent to many corrupt exchanges, where undertaking a search for a corrupt official to bribe is a specific investment that must be made before exchange is possible. Empirical evidence is presented from postcommunist Europe, where such social networks are a particular institutional legacy of the shortage economy under socialism.