Self-employment in urban China: Networking in a transition economy

This paper investigates the relationship between self-employment and social networks in urban China, an economy rife with informational and institutional imperfections, under-developed financial markets, but a growing and important non-state sector. Having a social network can help the self-employed access supply and credit networks, and assist in navigating an uncertain institutional environment where permissions and licenses often require inter-personal relationships to facilitate and reduce the informational costs of enforcement by dealing with known persons. Thus, holding other productive and observable traits constant including attitude toward risk where possible, social networks are expected to be a significant correlate to self-employment which is borne out by the evidence. Examining three tranches of the self-employed (those who are self-employed, those who are self-employed as a second job, and a sub-sample who have experienced unemployment and then became self-employed), the paper finds that social networks significantly predict self-employment except for those who are working for themselves as a second job. Gender differences are also notable.