Economic Institutions from Networks

By Victor Nee and Sonja Opper

Presented by Gabriel Malate and Taylor Brewer
Memo by Gabriel Malate

Economic Institutions from Networks

Economic Institutions from Networks by Victor Nee and Sonja Opper, offers an insight
into the economic institutions in China, particularly in comparing the behaviors and the
economic results of state supported industries versus the more recently established private
industries. Nee and Opper look into the networks that develop in private industry, and how these
close-knit networks actually bypass the need for state intervention. Essentially, what Nee and
Opper were able to conclude from a study of the Chinese economy was a phenomenon where
private institutions created the norms by which industries operated, with the state acknowledging
these inherent changes after the fact, and then following suit.
Nee and Oppers study looked at three particular questions regarding the behavior of
Chinese industry. First and foremost, Nee and Opper looked for an explanation to the rise and
growth of the private manufacturing industry over the more privileged state-owned enterprises.
Within this question, they also looked at how mechanisms built into current social exchanges
opened up the link to other institutional arrangements, and how the norms formed amongst these
institutional networks functioned to resolve conflict between principle and actor.
In this examination of the Chinese economy, Nee and Opper put several theories forward
regarding how the private Chinese market became an effective entity separate from state
intervention. The central focus of these theories is the decoupling of state rules and informal
norms created through networking. First off, Nee and Opper theorized that by relying on
personalized exchange, private institutions are able to reduce the risk and uncertainty involved
with hiring external servicers [pg. 17]. As more and more private institutions discover the
rationale behind this decoupling, these informal norms become more effective in monitoring the
principal-agent relation than rules imposed by the state. Eventually, the networks in which these

institutions are embedded in provide an effective reward and sanction system for the whole
network to operate within. From this, the economy of China developed what Nee and Opper
refer to as the bottom-up approach in which the private institutions create the informal norms
that govern economic action, with the legislation from the state following afterward, when the
norms created by the institutions prove effective [pg. 11].
The central study referenced by Nee and Opper was a survey taken in 2009 of seven
hundred Chinese entrepreneurs [pg. 29-31]. In this survey the participants were presented with
seven different scenarios regarding typical business discrepancies that are presented in principalagent relations. For these seven scenarios the participants were given seven responses, one
indicating that informal norms were not dictating economic action within that particular network.
From the 700 participants, more than half of the respondents said that they would alert others if
they encountered issues with sub-par deliveries and the supplier rejects to settle the issue through
some sort of compensation, and about 31% of the respondents expected that the community
would act to sanction deviators, with 26% of the community expecting significant losses in
business for those sanctioned. Additionally, most participants were confident that quality issues
could be addressed through personal negotiation. Overall, these results presented evidence for
the effectiveness of informal norms in networks amongst private institutions.
The case presented by Nee and Opper closely coincides with the case presented by
Hillmann and Aven on late imperial Russia. In both cases, it was found that in the absence of
sufficiently developed state governing institutions for governing institutional transactions,
reputation and informal norms formed by cohesive networks function in place of effective state
governance. Hillmann and Aven state that in these conditions industrial growth and development
also require access to diverse capital sources, requiring far-reaching networks [pg. 524]. Nee and

Opper supplement Hillmann and Avens study with insight into how these far reaching networks
can develop from these close-knit institutional networks. Though the time periods are separated
by about a century, it is surprising to find that many of the implications of reputation and
informal networking still apply to the case of modern day China.
Though thorough in theory, Nee and Opper only scrape the surface in their observation of
Chinese economic networks with their only experimental data coming from the survey of
Chinese entrepreneurs in 2009. But where their study lacks, Nee and Opper make it up in
concrete information on the economic trends seen in the Chinese economy in the recent decade.
Though the journal article itself is incomplete, it seems that further studies may be in progress to
correlate the strong private institution economic trends with the implications of institutional
networking presented by Nee and Opper.
Overall, Nee and Opper present a strong case for the use of informal networks in their
study of Chinese private institutions. Though limited in their data, Nee and Opper present a
seemingly strong start in correlating the strong private institution economic trend with the
implementation of informal norms and reputation based governance. Nonetheless, the evidence
that was provided showed that conformity was better enforced amongst the private institutions
themselves rather than state governance. Furthermore, their survey provided a case for the
effectiveness for the use of informal business norms in governing principle-agent relations, with
the great majority of the participants willing to enforce these informal norms. Additional studies
regarding the participation of the state, and the relationship between state, private institution, and
the economic trends presented would likely complete Nee and Oppers argument and are very
likely already in progress.

Works Cited

Hillmann, Henning, and Brandy L. Aven. "Fragmented Networks and Entrepreneurship in Late
Imperial Russia." SSRN Electronic Journal SSRN Journal (n.d.): n. pag. Web.
Nee, Victor, and Sonja Opper. "Economic Institutions from Networks." Center for the Study of
Economy and Society (2014): n. pag. 20 Aug. 2013. Web. 16 Aug. 2015.