Social Capital, Geographical Distance and Transaction Costs: An Empirical Analysis of Social Networks in African Rural Areas

This paper uses spatial economic data from the northern part of Ethiopia to investigate the cost minimizing capacity of social networking, which has not been sufficiently explored from a spatial perspective. Following identification of the domains of transaction costs that could be minimized, a propensity score matching technique is applied to estimate the effects of rural households’ participation in social networking for minimizing such costs. While framing the analysis from the perspective of rural households’ spatial proximity to a small town, the paper hypothesizes active participation in social networking as a mechanism for reducing transaction costs. It is evident from the results that active participation in social networking is a significant factor for minimizing the transaction costs incurred by households who live in relatively rural hinterlands. This confers an alternative option for rural people to improve their livelihoods in cases where geographical proximity to towns offers no advantage.