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Figuring the Net Worth of Trust

CONTACT: Laura Schechter, lschechter@wisc.edu

YOU CAN’T PUT A VALUE ON GOOD FRIENDS, or so the saying goes. But Laura Schechter, an assistant professor of agricultural and applied economics, thinks you can. She is out to understand the economic value of social networks–the friends, coworkers, families and organizations that we rely on for money, food or other kinds of support.

“Networks are important, but no one has really put a dollar value on it,” says Schechter. “Are networks worth 10 dollars or thousands of dollars? What’s the relative size?”

Schechter says such values are especially important in developing countries, where connections–and the lack of them–may have a significant impact on economic activity. She saw that firsthand as a Peace Corps volunteer in Paraguay, where she says a historical lack of trust bred by dictatorial regimes often prevented cooperation among farmers.

“They could do something that would make them all better off,” Schechter says, “but they couldn’t do it because they don’t trust each other. It has economic outcomes, and it isn’t in our models of behavior.”

After joining the UW-Madison faculty, Schechter returned to Paraguay to spend six months surveying farming communities around the country. She collected data on how much they borrowed from and leant to other farmers and explored deeper issues of trust and mistrust. She found, for example, that four in 10 farmers gave gifts to people they suspected might steal from them as a way of attempting to win trust and loyalty.

This intriguing union of economics and sociology has gained Schechter national attention. Last year, Yale Economic Review named her as one of “5 Hot Minds in Economics” for her innovative methods studying cash flow in communities. But Schechter’s real desire is that the work begins to influence economic policy.

“Figuring out who is important and which pieces of networks contain more economic value should be important for designing policy,” she says. “A person in the network who has very few connections, but only to important people, may be better to focus on rather than a person with many connections to unimportant people.”

You can’t put a value on good friends, or so the saying goes. But Laura Schechter, an assistant professor of agricultural and applied economics, thinks you can. She is out to understand the economic value of social networks–the friends, coworkers, families and organizations that we rely on for money, food or other kinds of support.

“Networks are important, but no one has really put a dollar value on it,” says Schechter. “Are networks worth 10 dollars or thousands of dollars? What’s the relative size?”

Schechter says such values are especially important in developing countries, where connections–and the lack of them–may have a significant impact on economic activity. She saw that firsthand as a Peace Corps volunteer in Paraguay, where she says a historical lack of trust bred by dictatorial regimes often prevented cooperation among farmers. “They could do something that would make them all better off,” Schechter says, “but they couldn’t do it because they don’t trust each other. It has economic outcomes, and it isn’t in our models of behavior.”

After joining the UW-Madison faculty, Schechter returned to Paraguay to spend six months surveying farming communities around the country. She collected data on how much they borrowed from and leant to other farmers and explored deeper issues of trust and mistrust. She found, for example, that four in 10 farmers gave gifts to people they suspected might steal from them as a way of attempting to win trust and loyalty.

This intriguing union of economics and sociology has gained Schechter national attention. Last year, Yale Economic Review named her as one of “5 Hot Minds in Economics” for her innovative methods studying cash flow in communities. But Schechter’s real desire is that the work begins to influence economic policy.

“Figuring out who is important and which pieces of networks contain more economic value should be important for designing policy,” she says. “A person in the network who has very few connections, but only to important people, may be better to focus on rather than a person with many connections to unimportant people.”