The Economic Value of Local Social Networks

The idea that local social capital yields economic benefits is fundamental to theories of agglomeration, and central to claims about the virtues of cities. However, this claim has not been evaluated using methods that permit more confident statements about causality. This paper examines what happens to firms that become affiliated with a highly-connected local individual or "dealmaker." We adopt a quasi-experimental approach, combining difference-in-differences and propensity score matching to address selection and identification challenges. The results indicate that firms who link to highly-connected local dealmakers are rewarded with substantial gains in employment and sales when compared to a control group.