Importance of Ethnic Networks for Business Transactions of the Small Enterprises

Importance of Ethnic Networks for Business Transactions of the Small Enterprises
November 2008-Rajkamal Iyer, Antoinette Schoar and Sandhya Kumar
Lead Center : Small Enterprise Finance Centre (SEFC)
Focus Area :SME Finance

This paper explores the importance of ethnic networks in determining the outcome of business transactions in Small and Medium Enterprises sector. In a situation of hold up1 the degree of trust between the business parties will affect the willingness to enter into an agreement with each other. If a wholesaler gets a product customized and then the buyer does not come back to collect the delivery; the value of the products becomes less than the market price. In our study, auditors from different ethnicity purchase either a customized or non-customized product for delivery at a later date. Auditors were asked to adhere to a script and a predefined bargaining process. The analysis of the data shows that ethnicity plays a critical role in determining the fate of a business transaction. A match in the ethnicity of both the parties impacts the bargaining process and subsequently affects the contracted price. These results suggest that ethnicity of parties involved in a contract plays an important role in determination of the contractual features


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This paper explores the importance of ethnic networks in determining the outcome of business transactions in Small and Medium Enterprises sector. In a situation of hold up1 the degree of trust between the business parties will affect the willingness to enter into an agreement with each other. If a wholesaler gets a product customized and then the buyer does not come back to collect the delivery; the value of the products becomes less than the market price. In our study, auditors from different ethnicity purchase either a customized or non-customized product for delivery at a later date. Auditors were asked to adhere to a script and a predefined bargaining process. The analysis of the data shows that ethnicity plays a critical role in determining the fate of a business transaction. A match in the ethnicity of both the parties impacts the bargaining process and subsequently affects the contracted price. These results suggest that ethnicity of parties involved in a contract plays an important role in determination of the contractual features