Using data on agricultural traders in Madagascar, this paper shows that social network capital has a large effect on firm productivity. Better connected traders have significantly larger sales and value added than less connected traders after controlling for physical and human inputs as well as for entrepreneur characteristics. The analysis indicates that three dimensions of social network capital should be distinguished: relationships with other traders, which among other things help firms economize on transactions costs; relationships with potential lenders; and family relationships. We find no evidence that social capital favors collusion.

Abstract1 This paper examines how relationships and networks affect market exchange in Sub-Saharan Africa. After noting that market exchange arguably plays a larger role in Africa than in developed economies, we show that the presence of transactions costs naturally leads market participants to enter in long-term trading relationships. These relationships form business networks that shape market outcomes. We argue that network segmentation can have large efficiency and equity costs, particularly in international trade. Because of network externalities, groups and countries that are familiar with a particular activity tend to continue investing in that activity. The presence of networks and non-convex transactions costs also complicates the analysis of market competition. Implications for future research are briefly discussed.

What do we know about extended families and kinship networks? What gaps in our knowledge most need to be filled? How can we best organize current work and identify priorities for future research? These questions are important for several reasons: households in developing countries depend on friends and relatives for their livelihood and sometimes their survival; help exchanged within extended families and kin networks affects the distribution of economic well-being, and this private assistance and exchange can interact with public income redistribution. Yet despite rapid recent progress there remain significant deficiencies in our understanding of the economics of extended families. Researchers confront a large and sometimes bewildering array of findings. We review and assess this literature by starting with an emphasis on standard economic concerns, most notably the possible interaction between government-provided social insurance and private kinship networks. Our review of the evidence suggests the specter of complete “crowding out,” whereby introduction or expansion of public transfers merely supplants private transfers, is exceedingly remote, though not impossible. However, numerous studies do suggest partial—but nonetheless substantial—crowding out, on the order of a 20-to-30-cent reduction in private transfers per dollar increase in public transfers. But the range of estimated effects is exceedingly wide, with many studies suggesting little private transfer response at all.

This paper analyses the effects of risk on the holding of inventories and liquid assets by manufacturing firms. Using a panel data set for Zimbabwe which includes firmspecific measures of contractual risk, we show that contractual risk has a major effect on the holding of stocks of inputs and, to a lesser extent, the constitution of cash reserves. This is consistent with the role of inventories as a hedge against stockout risk. By contrast, we find that firms facing more inter-annual market risk hold less inventories. This suggests that African manufacturers prefer adapting to long-term market fluctuations as they materialize rather than building up inventories. This interpretation is consistent with the finding that high market risk firms also have a low capacity utilization rate.

The economics literature has traditionally argued that competition negatively affects incentives to establish long-term, cooperative relationships. We provide a model to illustrate that the opposite result may hold in relationships where both parties must make up-front, non-contractible investments, a situation that often characterizes the establishment of surplus-increasing relationships. We provide evidence for this hypothesis in the context of the establishment of trade credit relationships, using data on the supply relationships of firms in five African countries. Because the data include several observations per firm, we are able to utilize firm fixed-effects, thus netting out unobserved firm characteristics that may have been

Drawing insights from the literature on credit and labor markets and from the author’s own survey work on contractual practices among manufacturers and traders in Africa, this paper investigates the spontaneous emergence of markets in the presence of heterogeneous agents. Using a dynamic game setting, we derive precise conditions under which relational contracting spontaneously emerges and deters opportunistic breach of contract even in the absence of formal market institutions. Exclusion of cheaters from future trade is not required for exchange to begin. Markets at early stages of development are characterized by trade based on mutual trust and on the sharing of information among acquaintances. As markets develop, newcomers may be excluded from trade when screening costs are high and agents long lived. Reputational equilibria in which cheaters are permanently excluded from trade are not decentralizable unless markets are already developed and breach of contract is interpreted as a sign of impending bankruptcy. Market emergence is a path dependent process.

The size of the informal sector is commonly associated with low per capita GDP and a poor business environment. Recent episodes of reform and growth in several African countries appear to contradict this pattern. From the mid 1980’s onward, Ghana underwent dramatic liberalization and achieved steady growth, yet average firm size in the manufacturing sector fell from 19 to just 9 employees between 1987 and 2003. I use a new panel of Ghanaian firms, spanning 17 years immediately post-reform, to model firm dynamics that differ markedly from well-established ‘stylized facts ’ in the empirical literature from other regions. In contrast with American and European firms, entry of new firms and selection on observable characteristics, rather than within-firm growth, dominates industrial evolution in Ghana. 1.

Recently researchers have been asking why Asian or European minorities in Africa seem to be more successful in business than are people of indigenous ethnicity. This paper draws attention to significant disparity in business ownership and performance that seems to exist among African ethnic groups as well. Having analyzed a random selection of small-to-medium sized manufacturers in Ethiopia, I find that establishments owned by an indigenous minority ethnic group, namely, the Gurage, typically perform better than those of members of major groups or other minorities. Other things being equal, Gurage-owned businesses are normally larger, partly because they start-up bigger, and partly because they grow faster. This could be part of the reason why the Gurage have a higher business ownership rate than any other group in the country. And yet Gurage business owners are the least educated ethnic group in the sample. Because the size and growth rate of a business also increases with the entrepreneur's education, the relative performance of other businesses would have been worse were it not for the higher level of schooling of their owners compared to the Gurage. Indeed, dropping education variables from the size determination equation drastically reduces the estimated advantage of Gurage-run businesses. This suggests that the observed ethnicity effect could be indicative of inter-group differences in unmeasured ability. More importantly, it also means that whether or not the effect will persist in the long run will depend on the trend in inter-ethnic differences in investment in education.

We investigate the question whether firms in the manufacturing sector in Africa are credit constrained. The fact that few firms obtain credit is not sufficient to prove constraints, since certain firms may not have a demand for credit while others may be refused credit as part of profit maximising behaviour by banks. To investigate this question, we use direct evidence on whether firms had a demand of credit and whether their demand was satisfied in the formal credit market, based on panel data on firms in the manufacturing sector from six African countries. More than half the firms in the sample had no demand for credit. Of those firms with a demand for credit, only a quarter obtained a formal sector loan. In line with expectations, our analysis suggests that banks allocate credit on the basis of expected profits. However, controlling for credit demand, outstanding debt is positively related with obtaining further lending while micro or small firms are less likely to get a loan than large firms. The latter effect is strong and present in the regression, despite including several variables typically referred to as explaining why small or ‘informal ’ firms do not get credit. The role of outstanding debt is likely to be a reflection of inefficiency in credit markets, while the fact that size matters is consistent with a bias as well, although we cannot totally exclude that they reflect transactions costs on the part of banks. Finally, we could not detect any differences between countries in the effects of these factors in the credit allocation rule, although financial deepening is found to explain most of the country-specific fixed effects, shifting the probability of obtaining credit across the firm distribution.

Personal networks can help rural workers find urban jobs. When the information flow increases due to the expansion of mobile phone, the new information flow may strengthen existing personal networks, such as ethnic networks, or provide opportunities to those who were previously outside of personal networks. We examine combined impacts of mobile phone and personal networks by using panel data of 856 households in 94 communities in rural Uganda, where the number of communities covered by mobile phone coverage increased from 41 to 87 communities over a two-year period between first and second surveys in 2003 and 2005, respectively. First, we find that the mobile phone network expansion increases the chance of choosing migration to find a job more for individuals who belong to a larger ethnic group than a smaller ethnic group in Kampala. Second, the possession of mobile phone handsets at the household level increases an individual’s chance of leaving his or her rural village to find a job when we instrumented the handset possession.