of morality”. In other words, the impartial spectator represents a universal judge about what is right and wrong. He is completely impersonal.
individuals differently. This seems to me the most reasonable approach for describing reality.
Why should some clear ‘moral outsider’ be considered to the same degree as an outright hero or accepted role models such as, e.g. Jesus Christ and Buddha? Suffice it at this point to have raised the question of how people observe others. A deeper discussion remains to future research.
CHAPTER 3
Signaling and Cooperation in Religious Networks
°Abstract: We present an economic signaling model contributing to the explanation of economic success of religious groups in the past. Religious groups are interpreted as a frame for signaling and exchanging information about and via others. Two effects occur. First, the larger the network, the worse the quality of a signal one receives of the type of other members. Second, the larger a network, the more potentially valuable information is available. Smaller groups could bear an economic advantage: they can economize on transaction costs because they can signal effectively, thus reducing the need of formal enforcement mechanisms.
Key words: Religious Groups, Signaling, Social Capital, Cooperation JEL Classification: N20, O17, R12, R15, Z12, Z13
1. Introduction
Economists usually take markets as anonymous arenas of transaction. Personal or any other details about the trading partner are not taken into account, except for what they are trying to sell or buy at what price. Of course economic theories are models, i.e. they abstract from reality. There is no need, even no wish to include all aspects of the world. However, the theories of transaction costs and institutional economics have started to question the set of assumptions behind the economic models at hand in order to enhance their explanatory power. Among other things, it was shown that the assumed anonymity of markets may create costs. These costs mainly arise from the danger of moral hazard. In other words, individuals have an incentive to receive a service or good without paying a corresponding return.
However, effective enforcement of claims is crucial for the success of any form of institution.
As Bowles and Gintis (1993: 87) state, the “success of institutions depends on their effectiveness in enforcing claims, not simply in their allocative efficiency.” Hence, enforcement devices are necessary which, in general, are costly.
A modernizing economy is characterized by an increasing number of trades with an increasing number of (increasingly anonymous) trading partners. Instead of producing the goods they need themselves, people trade work force for income and income for goods or
° Co-authored with Mehmet Karacuka, Ege University, Turkey. A previous version of this paper has been presented at the Annual Meeting of the European Public Choice Society 2006 in Turku, Finland. A revised version then appeared in the Working Paper Series of the Economics Department at the Ege University as Working Paper No. 06/10.
services. Further, the production process is characterized by increasing specialization which in turn again leads to an increase in the number of transactions of intermediary goods. In other words, the transaction sector of an economy is growing over time as the economy modernizes: the share of a society’s resources devoted to exchange is increasing. North (1984:
263) finds that primarily three factors are driving this development; namely growing specialization, increasing costs per transaction due to the change to anonymous interactions and rent-seeking activities of diverse groups.
Groups or individuals who manage to economize on these costs have a comparative advantage over others who cannot economize on them. This advantage could materialize in a better economic performance. Social networks, for instance, may avoid or at least decrease transaction costs arising from anonymity. They can do so because they rely on personalized trade rather than on anonymous transactions. In other words, people communicate with and about other members of the network. By facilitating communication about the others’
propensity to cooperate, each individual will have an incentive to build up a reputation as good trading partner. Otherwise nobody would trade with him – at least having a good reputation should increase the number of potential trading partners. This allows overcoming the coordination problems inherent in big, anonymous markets. Put differently, social networks substitute formal enforcement mechanisms such as detailed contracts by social enforcement mechanisms. Because the enforcement comes from “within the group”, Bowles and Gintis (1993: 85) call this form of enforcement “endogenous enforcement”. Since the enforcement of claims within a network does not necessarily rely on an institutionalized form, i.e. a formal organization, endogenous enforcement mechanisms bear smaller costs than formal ones. It should be noted, however, that sometimes social enforcement may not be available or other, formal mechanisms may be superior.
In order to successfully economize on transaction costs a social network should introduce costs for defecting individuals. This can, for instance, be achieved by high initial or participation costs, which will be sunk in case of detected defection. Further, a social network should provide a sufficiently high probability of detecting defectors.
It has been argued that religious activity is, in general, accompanied by costs. These costs occur in the form of initiation and/or rituals and/or other behavior with opportunity costs.
Individuals paying this price in turn receive high reputation and therefore credibility. In other words, religious activity and rituals can be regarded as costly signaling mechanism (see, e.g.
Iannaccone 1994, Sosis 2000, Sosis and Alcorta 2003).30
30 This idea is, of course, not new and dates back to at least Adam Smith (see, e.g., Smith 1979: 795).
To the best of our knowledge, the existing literature on reputation and signals in (religious) groups assumes the quality of signals to depend only on the “quality” of individuals. This ignores the possibility that the quality of signals is also dependent on the size of the respective group. Yet, group size plays an important role in shaping an individual’s choice to engage in cooperative behaviors, thereby influencing free-riding (see for instance Olson 1965). Members of small groups are expected to cooperate to a higher degree than the members of large groups, because the individuals’ identifiability is higher in the former than in the latter. Therefore, a small social group can provide selective incentives. Put differently, the social enforcement mechanism is more effective. The group may become overcrowded as the number of individuals to which this mechanism is to apply expands, making an effective distribution of information regarding the histories and “characters” of members to be communicated impossible (Leeson 2005). In other words, effective communication can become prohibitively costly or even outright impossible if the population is too large.
We will in the following focus on the size of a group as one further explanandum for economic success, as opposed to (religious) dogma. In a nutshell, we believe that small groups, especially religious groups, may face an economic advantage as compared to larger groups. Similar to Leeson (2005), we therefore in part regard fractionalization as consequence of bad or lacking (formal) institutions, rather than their cause. In the following section, we will motivate our idea by first examining in more detail how social groups or networks may provide a frame in which signals and information are being transmitted. We will use both terms, group and network, synonymously. This usage of terminology should be regarded as referring rather to the sociological meaning of it than to its meaning in economics. That is, the important aspect is that a collection of individuals share a focal feature, that they are aware of this fact, and that they identify themselves in part via this feature. As evidence for our hypothesis that small groups face an advantage in effective signaling, we will present several case studies from religious groups of the past. These groups have in common that they were extremely successful in economic terms. Section three will provide a formal treatment of our argumentation. A conclusion is offered in section four.