The predominant sociological approach to formation of economic networks focuses on past interaction: people get to know and trust each other, especially in social settings (“embeddedness”), and are then able to share information and do business together. Economists instead argue that actors strategically choose to invest in certain relationships based on forward-looking incentives. Oversimplifying, in economics you choose your network but in sociology your network chooses you.
This paper takes a step towards merging these two approaches. We do not attempt to do so at the most general level. Instead we focus on a specific class of actors (entrepreneurs) and thereby hope to show how merging the economic and sociological approaches can yield new predictions and policy recommendations in a concrete empirical setting.
