Decentralized groups such as close knit residential neighborhoods and ethnically linked businesses often achieve high levels of cooperation while also engaging in exclusionary practices that we call parochialism. We investigate the contribution of within-group cultural affinity to the ability of parochial groups to cooperate in social dilemmas. Consistent with some recent experimental evidence, cooperation among members of culturally homogeneous groups may not come about because cultural affinity overrides individual self interest, leading members to behave altruistically towards others in their group. Rather, cultural affinity may support cooperation by altering the information structure of the interaction. We provide an economic analysis of parochial networks in which the losses incurred by not trading with outsiders are offset by an enhanced ability to enforce informal contracts by fostering trust among insiders. We show that since larger and more heterogeneous networks have lower quality information but greater trading opportunities, there is a range of degrees of parochialism for which parochial networks can coexist with an anonymous market offering unrestricted trading opportunities.

Networks such as ethnic credit associations, close-knit residential neighborhoods, ‘old boy’networks, and ethnically linked businesses play an important role in economic life but have been little studied by economists. These networks are often supported by cultural distinctions between insiders and outsiders and engage in exclusionary practices which we call parochialism. We provide an economic analysis of parochial networks in which the losses incurred by not trading with outsiders are offset by an enhanced ability to enforce informal contracts by fostering trust among insiders. We first model one-shot social interactions among self-regarding agents, demonstrating that trust (i.e., cooperating without using information about one’s trading partner) is a best response in a mixed-strategy Nash equilibrium if the quality of information about one’s partner is sufficiently high. We show that since larger networks have lower quality information about specific individuals and greater trading opportunities, there may be an optimal (payoff-maximizing) network size. We then model the growth and decline of networks, as well as their equilibrium size and number. We show that in the absence of parochialism, networks may not exist, and the appropriate level of parochialism may implement an optimal network size. Finally, we explore the welfare implications and reasons for the evolutionary success of exclusion on parochial and other grounds.

We are indebted to Ira Lieberman for his time in providing an oral history of the privatization experience in Russia and of the role of the World Bank, and Bruce Carruthers, Michael Lounsboury, Gerry McDermott,

A rich literature argues that interorganizational networks foster learning and coordinated adaptation among their constituents, but embedded ties between organizations are not ubiquitous. What explains this heterogeneity? Acknowledging the influence of internal organizational dynamics can help refine the scope of embeddedness arguments. This idea is explored in an in-depth qualitative examination of supply relationships in drug development. Drawing on fieldwork conducted at six pharmaceutical and biotechnology firms, I explain why outsourcing deals sometimes take the form of embedded relationships, and other times take the form of seemingly inefficient spot contracts. The evidence suggests that the structure of constituent firms ’ internal labor markets powerfully shapes and constrains the scope of interorganizational networks.

We are indebted to Ira Lieberman for his time in providing an oral history of the privatization experience in Russia and of the role of the World Bank, and Bruce Carruthers, Michael Lounsboury, Gerry

ABSTRACT This paper describes and analyses the history of the fundamental equation of modern financial economics: the Black-Scholes (or Black-Scholes-Merton) option pricing equation. In that history, several themes of potentially general importance are revealed. First, the key mathematical work was not rule-following but bricolage, creative tinkering. Second, it was, however, bricolage guided by the goal of finding a solution to the problem of option pricing analogous to existing exemplary solutions, notably the Capital Asset Pricing Model, which had successfully been applied to stock prices. Third, the central strands of work on option pricing, although all recognizably ‘orthodox ’ economics, were not unitary. There was significant theoretical disagreement amongst the pioneers of option pricing theory; this disagreement, paradoxically, turns out to be a strength of the theory. Fourth, option pricing theory has been performative. Rather than simply describing a preexisting empirical state of affairs, it altered the world, in general in a way that made itself more true.

Please address all correspondence to the first author at Balliol College,

We would like to thank Jan Mladek for his extensive help in the Czech Republic. We are indebted to Ira Lieberman for his time in providing an oral history of the privatization experience in Russia and of

contributed to the development of the paper. All remaining faults remain our own. Both authors

Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Hedonic and Transcendent Conceptions of Value by