Substitutability in Favor Exchange

TL;DR

This paper develops a favor exchange model with substitutable favors, revealing how substitutability influences cooperation levels and network stratification, with implications for social and historical enforcement mechanisms.

Contribution

It introduces a novel favor exchange model incorporating substitutability and extends it to include transfers, heterogeneity, and multilateral enforcement, explaining social network stratification.

Findings

Intermediate cooperation levels emerge with substitutable favors.

Network value depends on the number of relationships when favors are substitutable.

Model explains social stratification and enforcement differences in historical contexts.

Abstract

I introduce a favor exchange model where favors are substitutable and study bilateral enforcement of cooperation. Without substitutability, the value of a relationship does not depend on the rest of the network, and in equilibrium there is either no cooperation or universal cooperation. When favors are substitutable, each additional relationship is less valuable than the previous, and intermediate levels of cooperation are observed. I extend the model to allow for transfers, heterogeneous players, and multilateral enforcement. My results can explain the stratification of social networks in post-Soviet states and the adoption of different enforcement mechanisms by different groups of medieval traders.