From Tradition to Modernity: Economic Growthin a Small World

This paper introduces the Small World model (Watts and Strogatz, Nature,1998) into the theory of economic growth and investigates how increasing economic integrationaects rm size and effciency, norm enforcement, and aggregate economic performance.When economic integration is low and local connectivity is high, informal normscontrol entrepreneurial behavior and more integration mainly improves search for effcientinvestment opportunities. At a higher level of economic integration neighborhood enforcementdeteriorates and formal institutions are needed to keep entrepreneurs in check. Agradual take-o to perpetual growth is explained by a feedback eect from investment tothe formation of long-distance links and the diusion of knowledge...