Tribes and Distrust: Linking Social Capital to Fraud Victimization
Abstract: Embedding transactions in informal social relationships is broadly expected to increase trustworthy behavior, especially in environments with weak formal institutions. This paper proposes that theories linking social capital to trustworthy behavior are incomplete because they fail to address the opportunity space for malfeasance created by the assumed trust in fellow group members. The analysis compares the role of coethnicity first in a principal’s selection of an agent in an impersonal market and second in a corrupt agent’s selection of victims in an intermediate fraud. The empirical setting is the ethnically diverse and contentious population of investors in Kenya’s emerging stock market. Analysis of investor-level data confirms that investors prefer coethnic stockbrokers and avoid brokers from rival ethnic groups, especially in areas with higher inter-ethnic conflict. However, the corrupt broker is also more likely to victimize coethnic clients, especially in the same conflict areas where investors increasingly rely on social capital for protection. Findings are robust to alternative modeling strategies and selection specifications. My findings expand research on the “dark side” of social capital, which to date have focused largely on efficiency issues, by examining the opportunity space for malfeasance created by the trust assumed in social relations.
