Social Distance and Self‐Enforcing Exchange

Abstract

This paper models social distance as endogenous to the choices of individuals. I show how large numbers of socially heterogeneous agents can use signals that reduce social distance to capture the gains from widespread trade. Although traditional reputational mechanisms of multilateral punishment break down where large populations of socially diverse agents are involved, ex ante signaling can make widespread trade self‐enforcing. Intergroup trade in precolonial Africa provides evidence for this mechanism.