Economic institutions from networks

Economic institutions enabling trust and cooperation rest on multiplex networks and norms of reciprocity. A key feature of economic institutions is that they facilitate commercial transactions by reducing uncertainty and risk in markets. When trust and trustworthiness stem from confidence in community sanctions of norms, principal and agent relations are enforceable without resorting to legal rules and litigation. This chapter examines industrial clusters, a key economic institution enabling emergence of private manufacturing firms in China. In industrial clusters, manufacturing firms economize on transportation costs, and benefit from a large pool of specialized human capital and informational spillovers. Comprising a core group of small and medium sized manufacturers linked to niche suppliers and distributors, a cluster location sustains dense multiplex networks that enable community sanctions. This enables collective action in solving problems of competitiveness and flexible adaption to changing market conditions.