Closure and Stability : Persistent Reputation and Enduring Relations among Bankers and Analysts

As the network around a set of people closes, it creates a competitive advantage known as social capital. The gist of the argument – found in economics (e.g., Tullock, 1985; Greif, 1989), political science (e.g., Putnam, 1993, 2000), and sociology (e.g., Coleman, 1988, 1990; Granovetter, 1985, 1992) — is that closed networks create a reputation cost for inappropriate behavior which facilitates trust between people in the network. A network is closed to the extent that the people in it have strong relations with one another or can reach one another indirectly through strong relations to mutual contacts. Information travels quickly in such networks. People wary of news reaching colleagues that might erode their reputation in the network are careful to display appropriate opinion and behavior. With a reputation cost for inappropriate opinions and behavior, trust is less risky within the network, people are self-aligning to shared goals, transactions occur that would be difficult outside the closed network, and production efficiencies result from donated labor and the speed with which tasks can be completed (see Burt, 2005:93-166, for review and diverse examples). Questions about network formation and decay are central to the social capital of network closure because stability is essential to the mechanism. For reputation to have its salutary effects, there has to be a credible threat that a person’s reputation will persist to affect future relationships. From a woman’s work in one project group, word gets around defining her reputation, which precedes her into her next project group. If negative reputation quickly dissolves, reputation loses its coercive power because