Introduction

As we have stated in previous chapters, informal labor services in bureaucracies are bought and sold in networks; in other words, selective behavior originates, takes form, and unfolds in networks. We have also argued that the activities taking place in these networks are best modeled as mimicking market supply and demand situations, hence our references to surrogate markets.

However, markets - whether competitive or not - presuppose the existence of property rights that are generally supported by laws and law enforcement. Although we treat networks as surrogate markets, we must insist that they differ from markets in the fundamental sense that the property rights that they presuppose are not supported by legal arrangements. Instead, they are supported by trust. In other words, whereas market exchange requires law-based property rights, network exchange necessitates trust-based property rights.

The analogy between law and trust should, however, not be pushed too far for at least two reasons. First, as we shall note in Section 4.6, the nature and properties of such market phenomena as externalities, moral hazard, and contingent contracts are different under the two arrangements. Second, many real-world property rights - in both markets and networks - are supported by both law and trust, albeit in sometimes dramatically different proportions. These arguments notwithstanding, it is enlightening to suppose that the distinguishing trait of markets is legally enforceable property rights and that of networks property rights based on trust. In the remainder of this chapter, we will assume that markets are supported only by legally enforceable property rights, whereas networks are supported only by trust.