SOCIALLY EMBEDDED CONSUMER TRANSACTIONS:

FOR WHAT KINDS OF PURCHASES DO PEOPLE

MOST OFTEN USE NETWORKS?*

Paul DiMaggio Hugh Louch

Princeton University Princeton University

Why and to what extent do people make significant purchases from people
with whom they have prior noncommercial relationships? Using data from
the economic sociology module of the 1996 General Social Survey, we docu-
ment high levels of within-network exchanges. We argue that transacting with
social contacts is effective because it embeds commercial exchanges in a
web of obligations and holds the seller S network hostage to appropriate role
performance in the economic transaction. It follows that within-network ex-
changes will be more common in risky transactions that are unlikely to be
repeated and in which uncertainty is high. The data support this view. Self-
reports about major purchases are consistent with the expectation that ex-
change frequency reduces the extent of within-network exchanges. Responses
to questions about preferences for in-group exchanges support the argument
that uncertainty about product and performance quality leads people to pre-
fer sellers with whom they have noncommercial ties. Moreover, people pre-
fer to avoid selling to social contacts under the same conditions that lead
buyers to seek such transactions; and people who transact with friends and
relatives report greater satisfaction with the results than do people who
transact with strangers, especially for risk-laden exchanges.

S ociologists and most economists agree

that people use personal networks to
gather information when they contemplate
purchasing noncommodity goods and ser-
vices. Yet most of these scholars assume-
economists on principle, sociologists by de-
* Direct all correspondence to Paul DiMaggio,
Sociology Department, 2-N-2 Green Hall,
Princeton University, Princeton NJ 08544
(dimaggio@phoenix.princeton.edu). We grate-
fully acknowledge support to NORC for the col-
lection of these data from the Lilly Endowment
and the Aspen Institute Nonprofit Research Fund
and support for the analysis from Princeton
University's Social Sciences and Humanities Fac-
ulty Research Fund. We also thank John Evans
for getting the data up and running; Frank Dob-
bin, Alejandro Portes, Tom Smith, Diane
Vaughan, Oliver Williamson, and the ASR Editor
and reviewers for useful comments; Bruce West-
ern for helpful advice on the analyses; and par-
ticipants in the Princeton Sociology Department's
JOIE Workshop and 1997 American Sociological
Association's Sociology of Markets session for
useful reactions.
fault-that market exchange entails imper-
sonal transactions among strangers. Cases in
which consumers buy from or sell to friends
or kin have received little attention. Even as
economic sociologists devote more attention
to the role of networks and "relational con­
tracting" in labor markets and business-to-
business relations (Powell and Smith-Doerr
1994; Uzzi 1997), the social organization of
consumer markets has been largely ignored.
Katz and Lazarsfeld (1955) undertook pio-
neering work on the role of networks in con-
sumer decision-making decades ago; but
since then few social scientists have con-
ducted empirical research on the influence of
social relations on consumption (Biggart
1989; Frenzen, Hirsch, and Zerrillo 1994).
Theoretical work on consumption has fo-
cused on the role of social relations in culti-
vating demand (e.g., through contagion or
bandwagon effects), to the exclusion of the
role of networks in concrete exchanges
(Becker 199 1; Granovetter and Soong 1986).
Given the progress of economic sociology in

American Sociological Review, 1998, Vol. 63 (October:619-637) 619


recent years, and given the centrality of con-
sumer behavior to economic life, this omis-
sion is surprising.
This study begins to redress this oversight.
We demonstrate that participants in several
kinds of consumer transactions often have
prior social ties. We develop hypotheses to
explain variation across types of transaction
in the degree to which people purchase goods
or services from persons to whom they are
connected through nonmarket social rela-
tions. We test predictions derived from our
theory with data from a national survey. Fi-
nally, we describe a research agenda that can
build on our results to illuminate the role of
social relations in consumer markets.
SOCIAL TIES AND CONSUMER
MARKETS
The conventional neoclassical view of eco-
nomic action as intensely individualistic has
been much pilloried by sociologists and re-
jected as simplistic by many economists
(Etzioni 1988). Granovetter (1985) argued
persuasively that economic transactions are
embedded in social structure: That is. the
structure of our social relationships, and not
simply a transaction-specific maximization
rule, determines our choices of economic
trading partners and how we interact with
them.
We treat embeddedness as a variable: The
unit of analysis is the economic transaction,
and our goal is to understand the conditions
under which consumers engage in exchanges
with persons to whom they are linked by
nonmarket relations. We distinguish two
ways in which social relations may enter into
consumer transactions. Actors may use social
relationships to identify and assess the reli-
ability of potential transaction partners to
whom they have no direct or close indirect
social ties: We call this search embedded-
ness. Or actors may choose persons with
whom they have preexisting noncommercial
ties as transaction partners: We refer to this
as within-network exchange.
The distinction is important. Much theory
predicts high levels of search embeddedness.
Strategic actors use networks to search for
the highest quality goods and services at the
lowest price, especially when they are uncer-
tain about product quality or provider perfor-
AMERICAN SOCIOLOGICAL REVIEW
mance (Brown and Reingen 1987; Geertz
1978; Granovetter 1985; Powell 1990:303).'
Even when uncertainty is moderate, a ratio-
nal consumer may use networks to identify
potential sellers or to assess the performance
of warrantied brand-name goods (e.g., decid-
ing to buy an IBM or a Dell computer).
By contrast, there is less theoretical war-
rant for anticipating high levels of within-
network exchange. Indeed, most sociological
work on consumption has focused not on
how people use their social relations to man-
age the market, but on how markets restrict
or enervate social relations (Zelizer 1996).
Studies of commodification almost unani-
mously depict markets as desocializing. This
perspective has deep roots: "[Tlhe market
and its processes 'knows no personal distinc-
tions,"' wrote Weber ([I9221 1946), ". . . it
knows nothing of 'honor.' The status order
means exactly the reverse" (p. 192).
Likewise, economic reasoning suggests
that within-network exchange should be less
common than search embeddedness. First,
search embeddedness is a more available
strategy: Most of us know many more people
who have purchased a good or service than
we know people who sell it. Second, within-
network exchange is constraining. Consum-
ers who prefer to do business with personal
contacts narrow the field of potential sellers
and may trade off price or quality against re-
liability. Moreover, transactions with friends
(or even with one's friends' friends) impose
reciprocal obligations that are absent when
buyers use networks solely for search.
Given all this, it is surprising that people
buy and sell goods and services from friends
and kin at all. But they do. Identifying and
explaining the role of networks in consumer
markets fills a gap in what may be economic
sociology's core agenda: exploring the social
organization of different varieties of markets
(White 1981).
Such research also has important implica-
tions for work in economics. For example,
economists who try to explain anomalous
heterogeneity in consumer prices invariably
portray economic decision-makers as reason-
Williamson (1991) describes the network "as
a nonhierarchical contracting relation in which
reputation effects are quickly and accurately com-
municated" (p. 291).
SOCIALLY EMBEDDED CONSUMER TRANSACTIONS
ing in isolation from their social ties. Indeed,
lawyers responding to an empirical survey of
legal-service pricing practices were in­
structed to assume that they had no social re-
lationships with their clients in reporting
their charges for various services (Cox,
DeSerpa, and Canby 1982). Similarly, work
on institutional responses to consumer mar-
ket failure rarely takes into account informal
social organization (Barzel 1982). Econo-
mists who study informal exchange institu-
tions in the less developed world assume that
within-network exchange is a second-best
solution and is readily abandoned in econo-
mies with modern contracting institutions
(Landa 1994:xi). Thus documenting empiri-
cally the extent of within-network consumer-
market exchanges and explaining their inci-
dence has important implications for both
sociology and economics.
DATA
Data come from one of two administrations
of the General Social Survey (GSS) under-
taken in 1996. The GSS is a full-probability,
personal interview survey designed to moni-
tor changes in social characteristics and atti-
tudes. It has been conducted almost annually
by the National Opinion Research Center
since 1972. (As a cost-saving measure, the
GSS shifted from annual surveys to pairs of
biennial surveys in 1994.) Since the mid-
1980s, the GSS has included topical modules
investigating specific areas in greater depth
than the ongoing core survey permits (Davis
and Smith 1992).
We use the economic sociology module
administered to all 1,444 people who re-
sponded to one of the two General Social
Surveys fielded in 1996. That module asked
respondents to report on specific economic
transactions and included several relevant at-
titude questions as well.
Split samples of respondents who had
purchased cars (in the past five years) or
homes (ever) were asked about their use of
social ties to locate exchange partners or
brokers. They were also asked about any
previous relationships to the sellers (previ-
ous owners for car transactions between in-
dividuals; and previous owners and. where
applicable, realtors in home purchases).
Purchasers of cars from individuals were
621
asked "Which of the following best de-
scribes your relationship to the person who
sold you the vehicle at the time of the pur-
chase?" Persons who had purchased cars
from used-car or new-car dealerships were
asked a similar question about "your rela-
tionship to the salesperson from whom you
purchased your car or to the owner of the
auto dealership" and were instructed to an-
swer on the basis of "your closest relation-
ship." Home-buyers were asked to describe
their "relationship to the previous owner of
the home you purchased." Those who used
realtors were asked to describe their rela-
tionship "to the real estate agent with whom
you worked in your purchase of the home or
to the owner of the real estate agency,"
again with instructions to answer with refer-
ence to the closer relationship of the two.
For each of these questions, respondents
were asked to choose among the following
responses: "a relative (including in-laws),"
"a friend or acquaintance," "a friend of a
friend or relative, or a relative of a friend,"
"not a friend, but someone with whom I had
previous business dealings," or "no prior re-
lationship." Respondents also were asked if
they were "not too satisfied," "pretty satis-
fied," or "extremely satisfied," with their
purchase.
All respondents were asked if they had
purchased legal or home-repair services in
the past 10 years. Those reporting that they
had were asked questions similar to those
asked of car and home-buyers about how
they located service providers, any previous
relationship to them, and satisfaction with
services received.
Attitude questions probed the relationship
between exchange roles and preferences for
within-network exchange. One-half of the
respondents were asked whether they would
prefer to sell bedroom furniture, a car, or a
home to "someone with whom you have had
some family or social relationship, or to a
buyer with which you had no prior personal
contact." Respondents were asked to choose
a position on a five-point scale, with 1 rep-
resenting "strong preference for no contact,"
3 indicating "don't care," and 5 indicating
"strong preference for contact." The other
half of the respondents were asked "Imagine
that you want to buy each of the following
items or services. Would you rather buy
622 AMERICAN SOCIOLOGICAL REVIEW

Table 1. Within-Network Exchange, by Type of Transaction: GSS, 1996

Percentages
Number of Friend or Two-step Not Friend1 No
Transaction Casesa Relative Acquaintance Compoundb Prior Dealings Relationship

All car sales 646 7.5 15.9 6.2 8.8 61.6

Any new car 207 2.4 11.1 3.9 9.2 73.4
Any used car 439 9.8 18.2 7.3 8.7 56.0
Used car from 250 15.6 23.2 7.2 6.4 47.6
individual
Used car from dealer 189 2.1 11.6 7.4 11.6 67.2

All home sales: Tie to 3 12 7.7 19.2 7.4 6.1 59.6

owner or realtor
Home sale through 218 0.5 3.7 0.5 3.2 92.1
agent: Tie to owner
Home sale through 218 4.6 16.1 6.9 6.4 66.1
agent: Tie to realtor
Private home sale: 94 14.9 23.4 8.5 2.1 51.1
Tie to owner

Legal services 645 1.4 17.2 6.7 13.5 61.2

Home maintenance 547 3.3 16.8 7.1 11.9 60.9

a N s are less than 1,444 because questions about car and home purchases were asked of split samples, and
because not every respondent had engaged in each transaction.
Two-step compound ties are ties between seller and buyer that pass through a third party to which each
is connected, when there is no direct tie between seller and buyer. Examples include friend of friend, rela-
tive of friend, and so on.

them from a business or service provider HOW COMMON ARE WITHIN-

with whom you had some family or social
relationship, or from a seller or provider
with whom you had no prior contact?" The
set of items for buyers included legal and
home-repair services as well as cars, homes,
and furniture.
Respondents were asked if they would re-
veal that a car they were selling, although
currently sound, had "a history of transmis-
sion problems." One-half of the sample was
told that they were selling to a relative, and
the other half was told that they were selling
to a stranger. All respondents were asked to
indicate agreement or disagreement (on a
five-point scale) with two assertions:
"People usually get a better price for goods
or services when they get them from friends
than when they deal with strangers"; and
"When friends buy or sell something to
friends, discussing price is usually awkward
or puts somebody on the spot."
NETWORK EXCHANGES?
Because the 1996 GSS is the first publicly
available national survey to ask respondents
about their relationships to persons from
whom they have purchased goods or ser­
vices, the raw frequencies are of consider-
able intrinsic interest. Given limits on net-
work size, the opportunity costs of avoiding
vendors to whom one is not socially tied, and
the problem of reciprocal obligation, we
would expect within-network exchanges to
be relatively uncommon. Yet substantial per-
centages of major transactions take place
between friends, relatives, or compound ties
(friends of friends, relatives of friends, and
so on) in social and/or kinship networks (see
Table 1).
Almost one-half of all used-car purchases
from individuals (46.0 percent) and home
purchases where no agent is used (46.8 per-
SOCIALLY EMBEDDED CONSUMER TRANSlACTIONS
cent) are transactions between relatives,
friends, or acquaintance^.^ Customers are
socially linked to service providers in ap-
proximately one in four purchases of legal
services (25.3 percent) and home-mainte-
nance services (27.2 percent). Even when
home-buyers use a realtor, 27.6 percent re-
port a social or kinship tie to their agent or
the owner of the agency. And 17.4 percent
of people who purchase new cars cite simi-
lar ties to an owner or employee of the deal-
ership.
These figures understate embeddedness
because they exclude repeat purchases and
other transactions with prior business con-
tacts. When such ties are included, the share
of embedded transactions rises to 26.6 per-
cent for car dealers, 34.0 percent for realtors,
38.8 percent for legal services, and 39.1 per-
cent for home maintenance.
A surprisingly high percentage of these re-
lations are direct to kin, friends, or acquain-
tances, rather than two-step compound ties
(i.e., relationships mediated by third parties,
such as relatives of friends). Fewer than 20
percent of within-network car and home-pur-
chase transactions between individuals are
based on two-step compound ties, as com-
pared with direct relations. For other trans-
action types, the figures are between 25 and
29 percent. Kinship ties are most common
between participants in person-to-person car
and home sales, and least common in the
purchase of legal services.
O u r enumeration of purchases from
homeowners is complicated by the fact that the
question about "relationship to the previous
owner" preceded the screening question that
might have prevented it from being asked of re-
spondents who did not purchase homes (with or
without the intercession of realtors) from persons
who owned them at the time of the sale. Conse-
quently, 19 of 72 respondents who described their
purchase as "other" (i.e., indicating that they did
not use a realtor and did not purchase the house
directly from its previous owner or its builder)
gave substantive responses to the "relationships
to the previous owner" question, as did 4 of 61
respondents who reported purchasing a home di-
rectly from its builder. In calculating the percent-
age of embedded purchases for sales by owners
and by realtors, we eliminated such respondents
(i.e., those who reported direct purchases from
builders or "others") from samples used to calcu-
late rates of within-network exchanges.
623
We conclude that interpersonal relations
play a crucial role in many consumption de-
cisions-not only in the search process, but
also in the choice of transaction partners.
Although we have no baseline against which
to compare the results of the General Social
Survey, the percentage of purchases .of
homes, cars, legal services, and home-main-
tenance services in which people deal di-
rectly with kin, friends, acquaintances, or
less frequently, two-step compounds of
these relations, strikes us as remarkably
high.
TWO TYPES OF WITHIN-NETWORK
EXCHANGE
Why do people engage in economic ex-
changes with people they know? We believe
that within-network exchange has two ana-
ly tically distinct origins.
(1) Persons may choose to transact with
fellow members of an in-group as a result of
their participation in systems of generalized
reciprocity characterized by a bias toward in-
group exchange (Bearman 1997). Such a sys-
tem may have positive functional conse­
quences, but the choice of transaction part-
ners in specific instances is influenced by
general dispositions that follow from a his-
tory of such participation and by normative
expectations that group members share.
Many ethnic enclave economies appear to be
systems of this kind (Portes and Stepick
1993).
(2) Individuals may choose to transact
with others with whom they are acquainted
as a result of explicit calculation or tacit
strategic understandings, even if normative
pressures or general dispositions are absent.
This is most likely to occur in transactions
that are perceived to entail a high risk that
the seller will take advantage of informa-
tional or other advantages. Trading with
friends or kin reduces risk by embedding
transactions in sets of continuous, multipur-
pose relations. From the buyer's perspec-
tive, the seller's willingness to transact with
a friend, relative, or compound tie repre-
sents a "credible commitment" in which the
seller's reputation and relations to other net-
work members become hostages to the
transaction (Williamson 1996; Yamagishi
and Yamagishi 1994).

To be sure, these two mechanisms are re-
lated: Systems of generalized reciprocity
tend to emerge in circumstances that are high
in risk (Greif 1994). We distinguish the
mechanisms analytically because different
empirical expectations are associated with
each. Because systems of generalized reci-
procity inculcate persistent and transposable
dispositions reinforced by collective norms,
empirical hypotheses that address this first
mechanism posit relatively stable variation
among persons across transactions. By con-
trast, because calculative rationality is trig-
gered by the transaction-specific perception
of risk, hypotheses that address the second
mechanism posit relatively stable variation
among types of transaction across persons.
We focus here on variations among differ-
ent kinds of transactions in the prevalence of
and attitudes toward within-network ex-
changes. We anticipate that: (1) The em-
beddedness of transactions varies with the
type of good or service exchanged as a func-
tion of the degree and type of uncertainty in
the transaction; and (2) preferences with re-
gard to within-network exchanges vary by
the actor's role in the transaction (as buyer
or seller).
We focus on between-transaction variation
rather than between-person variation because
the two kinds of variance are driven by dif-
ferent social processes, require different
forms of explanation, and require different
analytic methods. Because this is the first
empirical effort of its kind, we prefer to deal
systematically with one aspect of the prob-
lem rather than attempt to treat the full range
of issues.
EXPLAINING VARIATION IN
EMBEDDEDNESS AMONG
TRANSACTION TYPES
We adapt elements of transaction-cost analy-
sis-an approach developed to understand
the make-or-buy decisions of firms-to un­
derstand why within-network exchanges are
more common in some kinds of consumer
transactions than in others. Williamson
(1981, 1985, 1991) has interpreted firms'
choices of governance structure (contract,
hierarchy, or hybrid forms) as responses to
the frequency, uncertainty, and asset speci-
ficity of transactions under conditions of
AMERICAN SOCIOLOGICAL REVIEW
bounded rationality and opportunism. Simi-
larly, we view within-network exchange as a
governance structure for consumer transac-
tions, and we ask under what conditions con-
sumers are likely to prefer it.
The Specificity of Consumer Behavior
Consumer markets differ from producer mar-
kets in three relevant respects. These differ-
ences render unavailable or unsatisfactory
the leading solutions (contract and hierarchy)
to businesses' transactional dilemmas.
(1) Very expensive consumer purchases
are infrequent and therefore do not entail on-
going relationships. Consequently, asset
specificity (the accumulation of costly rela-
tion-specific investments) is rarely a serious
problem in product markets, rendering hier-
archy unnecessary. ("Asset specificity" re­
fers to factors that tend to lock transaction
partners into a relationship by imposing high
costs or penalties on a party who terminates
the relationship.)
(2) Although human asset specificity is a
problem in consumer service markets, few
consumers have the resources to purchase
problematic contractors or interest in doing
so. Thus hierarchy is not a viable solution to
service-market dilemmas.
(3) Spot markets are effective in so far as
contracts are not needed or can be written to
take into account the full range of likely con-
tingencies (Macauley 1963; Williamson
1985). In producer markets, explicit con-
tracts solve two distinct problems: ambigu-
ity (clarifying points that might otherwise
cause misunderstandings) and bad faith (pro-
viding legal remedies). For most consumers,
litigation is so costly and inconvenient that
contracts solve problems of ambiguity but
not of bad faith (Macauley 1985:467-69).
Consequently, reliance on contract is a poor
solution for a consumer who doubts that a
seller or service provider is committed to ful-
filling the contract's terms.
Embeddedness as a Response to Risk
If imperfections in consumer markets are not
addressed adequately by hierarchy or con-
tract, how can consumers minimize the risk
that sellers will behave opportunistically?
We propose that the greater the risk that a
SOCIALLY EMBEDDED CONSUMER TRANS ACTIONS
transaction poses to consumers, the more
likely are consumers to seek out sellers to
whom they have preexisting social ties.
Risk refers to the probability that a trans-
action's outcome will be substantially infe-
rior to that on which a reasonable consumer
would bargain. We view risk as an interac-
tive function of information asymmetry be-
tween buyer and seller and the probability
that a seller will opportunistically take ad-
vantage of such asymmetry. Search em­
beddedness addresses information asymme-
try by increasing the amount of information
that the buyer takes into the purchase about
the product or service, the identity of poten-
tial transaction partners, and the prior per-
formance of each. Within-network exchange
addresses opportunism as well, reducing the
risk that the seller will behave opportunisti-
cally after the purchase by introducing obli-
gations and sanctions external to the trans-
action.
Consider the canonical example of a con-
sumer purchasing a used car. According to
Akerlof (1970), the risk inherent in this ex-
change-that the seller can conceal problems
with the vehicle and that some sellers choose
to do so--creates an incentive structure that
presses all used-car dealers to behave oppor-
tunistically. This occurs because rational
consumers, unable to discriminate between
honest and dishonest sellers, will assume that
all are dishonest and discount the value of
the vehicle to take account of potential un-
observable flaws. The global consequences
of this dilemma are well known: Dishonest
dealers tend to outcompete honest ones in the
long run and consumers demand legislative
remedies like lemon laws. Here we are inter-
ested in how a consumer approaches a mar-
ket of this kind.
We suggest that consumers rely on their
social relations to reduce risk in two ways.
First, they ask friends and acquaintances
about their experiences in order to locate the
most dependable dealers with the best repu-
tations. Second, if possible they may pur-
chase a car from a dealer with whom they
have an ongoing personal relationship that
the dealer may be loath to jeopardize. This
relationship may be direct (the dealer may be
an old friend who values the friendship for
its own sake) or indirect (the dealer may be a
spouse's relative, for whom shady practice
could incur family-wide retaliation). In ei-
ther case, the mechanism is the same:
Within-network transactions reduce buyer
risk by imposing costs on sellers who take
advantage of opportunities to exploit advan-
tages internal to the exchange. The commer-
cial transaction is embedded in a multiplex
network of ongoing interactions, so that the
actor's behavior in the commercial exchange
(e.g., selling a used car) influences the way
in which he or she is treated by many differ-
ent actors across a range of interactions (in-
cluding noncommercial ones) extending well
into the future.
What attributes of consumer transactions
render risk sufficiently great to justify the
high opportunity costs and reciprocal obliga-
tions associated with within-network ex­
changes? First, risk is a function of transac-
tion frequency (Williamson 1981). Risk is
substantial for onetime transactions in which
the seller has no economic interest in a fu-
ture relationship with the buyer. This is the
case when the buyer is unlikely to make a
repeat purchase from the seller, and it is es-
pecially the case in what Smith (1990:52-57)
refers to as "private-treaty transactions"
(e.g., the sale of a personal car or home), in
which the seller has no enduring interest in
establishing or maintaining a commercial
reputation.
Second, the degree of risk is related to un-
certainty about the quality of the product or
service purchased (Kollock 1994). Two types
of uncertainty are relevant: uncertainty about
the quality of a good (product uncertainty),
and uncertainty about the quality of a seller's
future performance (performance uncer­
tainty). Of these two, risk related to perfor-
mance uncertainty is more substantial
(Coleman 1990:90-95; Shelanski and Klein
1995).
In most consumer transactions, the pri-
mary problem is uncertainty about product
quality. Performance uncertainty is limited to
cases in which the seller retains possession
of a good after the purchase agreement and
therefore can alter its character before deliv-
ery (e.g., removing fixtures from a home or
replacing a costly~carradio with a cheaper
unit). Even in these situations, performance
uncertainty may be moderated by the use of
detailed contracts, as is customary in home
purchases.

Performance uncertainty is a more serious
problem in service transactions for three rea-
sons. First, service providers often receive
advance deposits. Therefore buyers cannot
dismiss providers lightly, and efforts to re-
solve disputes may entail lengthy delays dur-
ing which consumers are without vital ser-
vices or, in cases of repair or construction,
cannot use their property. Second, adequate
performance often relies on the provider's
expertise, entails substantial discretion, and
thus cannot be specified in a contract. Third,
many service relationships entail significant
human-asset specificity such that in replac-
ing one provider with another (changing at-
torneys in the middle of a case, or contrac-
tors in the midst of a home-remodeling job),
a purchaser risks significant start-up costs
and retribution through withheld information
or damage to p r ~ p e r t y . ~
HYPOTHESES
Four general hypotheses follow from these
arguments, and they yield several specific
predictions about the effects of transaction
variables on within-network exchange.
Hypothesis 1: Effects of Transaction
Frequency
Consumers may believe that businesses are
constrained from taking advantage of infor-
mation asymmetries by their desire for repeat
trade and the related need to maintain posi-
tive reputations, whereas individuals selling
personal possessions are not so constrained.
Consumers also may expect the degree of a
seller's self-restraint to be greater for com-
The degree of risk is also a function of cost,
of course. When uncertainty is high and cost is
low (e.g., buying a secondhand waffle iron for a
couple of dollars), people may prefer to accept
risk rather than invest in search. When more
money is at stake, search costs are more accept-
able. We expect actors to use any means, includ-
ing networks, to search more intensely for infor-
mation when the cost of a product or good is high.
But we expect cost to be related to within-network
exchanges only for transactions characterized by
nonrepeatability or uncertainty. We can only
speculate about the influence of cost on transac-
tion embeddedness because the GSS did not col-
lect data on purchase prices.
AMERICAN SOCIOLOGICAL REVIEW
panies that rely on repeat business than for
those with whom subsequent transactions are
unlikely or temporally distant. Therefore we
expect consumers to rely more on social re-
lations when they buy things that they pur-
chase rarely than when they make more fre-
quent purchases. And, especially, we expect
them to rely more on social relations in buy-
ing from individual sellers than when pur-
chasing through intermediaries (e.g., real es-
tate agents) or from businesses.
Hypothesis l a (behavioral version): The
greater the seller's reliance on commer-
cial reputation and repeat business, the
less prevalent are within-network ex-
changes.
We expect within-network exchanges to be
most frequent for car and home purchases
from individuals, who have no interest in
commercial reputation. Because most people
buy homes rarely, especially if they are not
geographically mobile, we expect within-
network exchanges to be more common in
the selection of realtors than in purchases of
legal or home-repair services or of cars from
dealers.
Hypothesis I b (preference version): The
greater the sellers' reliance on commer-
cial reputation and repeat business, the
less likely are purchasers to prefer to
deal with network members.
We expect buyers' preferences for within-
network transactions to be most pronounced
for home purchases, followed by car pur-
chases or purchases of legal or home-repair
services, and least pronounced for purchases
of furniture, which are likely to be relatively
routine.
Hypothesis 2: Effects of Uncertainty
Uncertainty stems from the seller's posses-
sion of information about product or service
quality that may be withheld from potential
purchasers. Uncertainty is gravest under
conditions of asset specificity, when perfor-
mance quality is unobservable and purchas-
ers depend on providers' candor and good
will. Because these conditions characterize
service transactions, we expect within-net-
work exchanges to be most common in ser-
SOCIALLY EMBEDDED CONSUMER TRANSACTIONS
vice markets, less common in the sale of
physical assets of uncertain quality, and least
common for standardized commodities.
Hypothesis 2a (behavioral version): The
greater the uncertainty regarding the
quality of a good or service (assuming
significant cost), the greater the likeli-
hood of within-network exchanges.
To avoid confounding the effects of uncer-
tainty with those of frequency, we restrict
comparisons to individual purchases from
commercial enterprises and eliminate trans-
actions among individuals. We expect that
people are most likely to use social contacts
for service transactions, which involve sub-
stantial performance uncertainty, followed in
frequency by purchases characterized by
substantial product uncertainty (any home or
a used-car purchase) and by purchases of
warrantied quasi-commodities (new cars).
Hypothesis 2 b (preference version): The
greater the uncertainty regarding the
quality of a product or service, the
greater the consumer's preference for
transacting with a partner to whom he or
she is socially connected.
We expect people to express stronger prefer-
ences for buying from personal contacts
when they purchase legal services or home-
repair services than when they buy cars,
homes, or, especially, furniture (a relatively
standardized commodity).
Hypothesis 3: Buyer versus Seller
Preferences
We have emphasized the value of transact-
ing with known exchange partners from the
perspective of purchasers. We do so based on
the expectation that networks of shared ties
reduce risk by imposing external costs on
sellers who behave opportunistically. From
the seller's standpoint, such entanglements
may make trading with known partners less
attractive. This is true of sellers who are in-
clined to behave opportunistically. Ethical
vendors may be torn between wanting to
avoid situations in which honest misunder-
standings may have wide ramifications and
hoping to use social relationships to enlarge
their client base, a common strategy in some
direct-sales organizations (Biggart 1989).
627
Private individuals selling a personal home
or car have no such incentive.
Hypothesis 3: Sellers are less likely than
buyers to prefer to transact with people
to whom they are socially linked, and
more likely to prefer to transact with
strangers. The strength of this tendency
is a negative function of the trans-
action's frequency and a positive func-
tion of its uncertainty.
We expect buyers to prefer within-network
exchanges more than sellers for all transac-
tions (home, cars, and bedroom furniture) in-
cluded in our split-sample experiment. We
expect differences between buyers' and sell-
ers' preferences to be greatest for home sales,
which are less frequent and at least as uncer-
tain as car purchases, and smallest for furni-
ture sales, which are more frequent and en-
tail less uncertainty than either home or car
transactions.
Hypothesis 4: Within-Network Exchange
and Satisfaction
If people purchase products and services
from businesses and private persons to whom
they have social ties in order to reduce the
risk of opportunism, then we would expect
such people to be more satisfied with the re-
sults of those transactions and more success-
ful in avoiding negative outcomes than those
who transact with strangers.
Hypothesis 4 : People who transact with
members of their social networks are
more likely to report high levels of sat-
isfaction and less likely to report low
satisfaction with the product or service
they receive.
This tendency should be greatest for pur-
chases of services (because of performance
uncertainty) and least for purchases of new
cars, the most standardized item about which
the satisfaction question was asked.
ANALYTIC APPROACH
We test each hypothesis by examining pairs
of transactions to see if differences in behav-
ior, preferences, or outcomes conform to our
predictions. Although the GSS, which uses a
household sample, includes weights for num-

ber of adults in the household, we use un-
weighted data because most of the transac-
tion types we examine are ordinarily house-
hold purchase^.^
Whenever data permit, we employ paired
t-tests, a type of fixed-effects procedure, to
test the significance of mean differences be-
tween responses of the same individuals to
different questions. Paired t-tests control for
the direct impact of individual-level differ-
ences in the following way. Let xi equal the
value of a binary variable indicating whether
a respondent who purchased legal services
bought them from a social tie (= 1) or a
stranger (= 0). Let xj equal the value of a bi-
nary variable indicating whether the same re-
spondent purchased a car from a social tie
(= 1) or a stranger (= 0). Imagine that our hy-
pothesis is that people are more likely to pur-
chase legal services than cars from social
contacts. A new variable is created by sub-
tracting xj from xi. We then apply the equiva-
lent of a single-sample t-test to the difference
measure to test the hypothesis that the dif-
ferences diverge significantly from zero
(Agresti and Agresti 1979: 184-88).5
The use of paired t-tests is especially ap-
propriate for this study given the fact that the
GSS data lack direct measures of the cost,
frequency and perceived risk of specific
transactions. The paired t-tests control for
individual differences associated with these
factors (e.g., the tendency of wealthier
people to buy more expensive cars and pur-
chase them more often), while permitting us
to test directly the hypotheses about differ-
ences between transaction types.
When the study design did not permit in-
ternal comparisons of this kind (e.g., in com-
parisons between car-purchase and home-
None of the measures we used was signifi-
cantly correlated with the number of adults in the
household. Therefore our decision not to weight
was not consequential.
Using the mean of the differences rather than
the raw percentages may render ordinary distri-
butional assumptions suspect. To guard against
this, we used a bootstrap procedure, taking mul-
tiple samples from the data to determine the ap-
propriate sample mean and to avoid accepting an
hypothesis on the basis of limited information
(Efron and Tibshirani 1993). The results of the
bootstrap tests concurred with those of the ordi-
nary t-tests in nearly every case.
AMERICAN SOCIOLOGICAL REVIEW
purchase reports, which were requested of
split samples, and in subgroup analyses for
which cell sizes were too small to sustain
paired tests), we used simple difference-of-
group-proportions tests (Agresti and Agresti
1979: 169-173). One-tailed significance tests
were used to evaluate directional hypotheses.
RESULTS: VARIATION IN
EMBEDDEDNESS BY TRANSACTION
TYPE AND ROLE
Tests of Hypotheses 1 and 2: Behavioral
Data
Table 2 presents results of tests of Hypoth-
esis 1, which predicts that the incidence of
within-network exchanges will be signifi-
cantly greater for infrequent than for fre-
quent transactions. The behavioral-report
data support the expectation that people are
more likely to transact within networks for
purchases that are unlikely to be repeated,
especially when the seller is a private person
with no interest in a commercial reputation.
Data from the full sample support 7 of 11
pairwise predictions. As predicted, car trans-
actions between individuals entail more
within-network exchanges than do home pur-
chases through realtors, purchases of cars
from dealers, or purchases of home-mainte-
nance services or legal services. Home-pur-
chase transactions between individuals with-
out a realtor's intercession exhibit greater
embeddedness than do transactions with
realtors or purchases of cars from dealers.
And home purchases through realtors (infre-
quent transactions for most people) are sig-
nificantly more embedded than are car pur-
chases from dealers.
The four predictions that were not sup-
ported posited more frequent within-network
exchanges for home sales (individual-to-in-
dividual sales and those mediated by
realtors) than for service-market transactions
(legal and home-maintenance). How can we
explain this anomaly?
Market behavior reflects not only buyers'
preferences for using personal networks, but
also the size and composition of the net-
works that they have available to them. The
probability of knowing someone in a given
field is a function of the number of people in
that field and of the size and density of their
SOCIALLY EMBEDDED CONSUMER TRANSACTIONS

Table 2. Difference-Test Results for Frequency of Within-Network Exchanges (Hypothesis la, Fre­
quency): GSS 1996

Transaction Transaction

Predicted Predicted

to Entail to Entail
Mean Stable
More Frequent Less Frequent Difference, Residents Only a
Within-Network Within-Network Full
Exchanges Exchanges Sample d.f. Paired d.f. Unpaired d.f.

Car: private sale Car from dealer

Car: private sale Home from realtor
Car: private sale Legal services
Car: private sale Maintenance services
Home: private sale Car from dealer
Home: private sale Home from realtor
Home: private sale Legal services
Home: private sale Maintenance services
Home from realtor Car from dealer
Home from realtor Legal services
Home from realtor Maintenance services
Note: Table entries are mean differences. Numbers in parentheses are degrees of freedom for the signifi-
cance tests.
a Ns for paired tests on subsamples are so small (sample attrition is largely due to split-sample design)
that unpaired (difference-of-mean) tests are also reported.
Because of the split-sample design, paired tests are not possible for these comparisons.
* p < .05 (one-tailed tests)

networks, and these numbers vary widely.
(There were 57 1,000 lawyers in private prac-
tice in 1991, 718,000 realtors in 1995,
899,000 employees of car dealerships in
1993, and 2,87 1,000 employees of residen-
tial general contractors, plumbers, painters,
electricians, masons, carpenters and workers
in related fields in 1992 [U.S. Bureau of the
Census 1996:214, 505, 762, 709]).6 Some
buyers who would prefer to transact with a
friend or relative will not do so because no
suitable transaction partner is available. And
networks are more likely to facilitate some
transaction types than others. (At any given
time it is probably easier for most people to
identify a relative willing to sell them a car
than to find one from whom they can buy a
home.)
The last figure is approximate, as it includes
nonresidential workers in trades other than gen-
eral contractor and excludes many skilled con-
struction workers who moonlight or otherwise
provide services to homeowners "off the books."
Home purchases differ from the other
transactions in a way that makes the ab-
sence of data on network size or availability
especially salient: The same circumstances
that cause people to purchase new homes
often attenuate their relevant personal net-
works. One can purchase a car anywhere,
but one buys a house where one intends to
live. People who move to a new community
often purchase houses before developing
personal ties to people in that location. Such
movers are probably much less likely to en-
gage in home-purchase transactions with so-
cial contacts than are long-term residents
because they have fewer contacts with
whom to transact.
The GSS has no direct measure of recent
mobility, and respondents were not asked
why they purchased a home when they did.
But the GSS does identify respondents who
reside in the same community that they lived
in when they were 16 years old. This is an
imperfect proxy for the strength of local net-
works because some respondents identified
630 AMERICAN SOCIOLOGICAL REVIEW

Table 3. Difference-Test Results for Frequency of Within-Network Exchanges (Hypothesis 2a, Un-
certainty): GSS, 1996

Transaction Transaction

Predicted to Entail Predicted to Entail

Mean
More Frequent Less Frequent Difference,
Within-Network
Within-Network Full College Graduates Only a
Exchanges
Exchanges Sample d.f. Paired d.f. Unpaired d.f.

Legal services Used car from dealer

Legal services New car from dealer
Legal services Home from realtor
Maintenance services Used car from dealer
Maintenance services New car from dealer
Maintenance services Home from realtor
Used car from dealer New car from dealer

Home from realtor New car from dealer

Note: Table entries are mean differences. Numbers in parentheses are degrees of freedom for the signifi-
cance tests.
a Ns for paired tests on subsamples are so small (sample attrition is largely due to split-sample design)
that unpaired (difference-of-mean) tests are also reported.
Because of the split-sample design, paired tests are not possible for these comparisons.
* p < .05 (one-tailed tests)

as "movers" by this criterion no doubt re-
sided in their community for years before
purchasing the home to which their re­
sponses referred, and some "stayers" may in
fact have returned to their native community
after an extended absence. But a poor proxy
is better than none at all.
We compared home sales (with and with-
out realtors) to car purchases from dealers,
legal-service transactions, and home-mainte-
nance-service purchases for "stable" respon-
dents: those who still resided in the town
they lived in when they were age 16. For this
subsample, which seems likely to have, on
average, comparatively well-developed local
networks, Hypothesis l a was supported:
Within-network exchanges remained signifi-
cantly more common in direct purchases
from individuals than in those mediated by
agents. But both kinds of home transactions
were more likely to entail within-network
exchanges than were transactions for legal
services, home maintenance, or car pur-
chases from dealer^.^
By contrast, the behavioral data provide
meager support for Hypothesis 2, which pre­
dicts that uncertainty about product quality
fosters within-network exchange (Table 3).
As predicted, people are more likely to trans-
act with social ties when they buy homes or
purchase legal services than when they buy
new cars. The other six predicted relation-
ships were insignificant, however. The fact
that the uncertainty hypothesis yields a pre-
diction opposite that derived from the fre-
quency hypothesis explains the absence of a
significant difference between service trans-
actions and home purchases. The failure of
home-maintenance and legal-service transac-
tions to involve more within-network ex-
changes than used-car purchases is more sur-
prising.
If ties to attorneys, who are prestigious and
highly educated professionals, are more
available to well-educated than to less edu-
cated persons-a reasonable assumption
given that social networks tend to be homo-
philous with respect to education (Marsden

' Paired tests fell short of significance for the mean differences were comparable to between-
comparisons between individual home transac- group differences in means, suggesting that fail-
tions (N = 22) and between home sales through ure to reach significance reflected the small cell
realtors and legal-service purchases (N = 35), but frequencies.
SOCIALLY EMBEDDED CONSUMER TRANSACTIONS 631

Table 4. Difference-Test Results for Network Preference Data: GSS, 1996

Transaction
Transaction

Predicted to Entail
Predicted to Entail

Greater Preference Less Preference Mean Degrees

for Within-Network
for Within-Network Difference, of
Exchanges
Exchanges Full Sample Freedom
Hypothesis lb: Frequency
Home purchase
Car purchase
Home purchase
Legal services
Home purchase
Maintenance services
Home purchase
Furniture purchase
Car purchase
Furniture purchase
Legal services
Furniture purchase
Maintenance services
Furniture purchase

Hypothesis 2b: Uncertainty

Legal services
Car purchase
Legal services
Home purchase
Legal services
Furniture purchase
Maintenance services
Car purchase
Maintenance services
Home purchase
Maintenance services
Furniture purchase
Home purchase
Furniture purchase
Car purchase
Furniture purchase
* p < .05 (one-tailed tests)

1988)-then supply factors may distort our
results for legal-service purchases. To ex-
plore this possibility, we ran separate com-
parisons between legal-service purchases and
ised-car, home, andnew-car transactions for
respondents with college degrees. College
graduates were significantly more likely to
report transacting with kin, friends, acquain-
tances, or compound ties when they pur-
chased legal services than when they bought
new cars or used cars from dealers.
To summarize, analyses of behavioral re-
ports lend strong support to the frequency
hypothesis and very weak support to the un-
certainty hypothesis. All 11 predictions of
the frequency hypothesis are supported once
a crude proxy for the availability of ties to
homeowners and realtors (residential stabil-
ity) is introduced into the analyses. Only 3
of 8 predictions of the uncertainty hypothesis
are supported, 1 only after introducing a
proxy for tie availability (college education).
These results suggest that purchases of goods
and services from persons with whom one
shares social ties is a strategy for reducing
risk by making the seller's relations with
mutual associates a hostage to his or her per-
formance in the transaction.
Tests of Hypotheses 1 and 2: Preference
Data
The preference data supplement the behav-
ioral indicators in four ways. First, they per-
mit us to ignore the peculiarities of particu-
lar transactions and tap people's preferences
based on their schematic expectkions-the
images they carry in their heads-for differ­
ent types of transaction. Second, unlike be-
havioral reports, preferences should not be
influenced directly by variation in network
size and composition. Third, in addition to
cars, legal services, home-maintenance ser­
vices, and homes, respondents were asked
about purchases of bedroom furniture, ex-
panding the range of variation with a pur-
chase relatively low in uncertainty and high
in frequency. Fourth, because all questions
were asked of one-half of the sample (the
other half was asked to imagine themselves
632 AMERICAN SOCIOLOGICAL REVIEW

Table 5. Percentages of Respondents Preferring Within-Network Exchanges versus Exchanges with

Strangers by Transaction Type and Role: GSS, 1996
Prefers Exchange with Stranger Prefers Within-Network Exchange
As Buyer As Seller As Buyer As Seller
Transaction % S 8 S Difference 8 N 9 S Difference
Bedroom furniture 19.2 (694) 20.2 (718) 1.O 27.5 (694) 17.0 (718) 10.5:
Car 20.6 (694) 31.0 (720) 10.4' 49.7 (694) 18.5 (720) 31.2:
Home 17.2 (697) 25.7 (717) 8.5' 45.5 (697) 19.2 (717) 26.3'
Legal services 16.2 (693) NA - 60.9 (693) NA -
Home maintenance 12.0 (700) NA - 62.6 (700) NA -
Note: Ns are less than 1,444 because buyer and seller roles were addressed in split samples. Respondents
were given a card and asked to place themselves on a continuum from 1 ("strong preference no contact") to
5 ("strong preference contact"), with the mid-point (3) labeled "don't care." Those choosing 1 or 2 are
included under "prefers exchange with stranger" above; those choosing 4 or 5 are included under "prefers
within-network exchange." (The percentage choosing 3 is the complement to the percentages reported above
for each transaction typelrole combination.)
* p < .05 (one-tailed tests for significance of difference between percentages of buyers and sellers)

in the "seller" role), all hypotheses can be
evaluated with mean difference tests, thus
controlling for the effects of all the indi-
vidual differences that shape preferences for
in-group exchanges as opposed to imper-
sonal exchanges.
In contrast to the behavioral data. mean-
difference tests using the preference data
provide only modest support for predictions
of the frequency hypothesis (Table 4). Four
of seven predictions are supported, but these
are all comparisons between furniture pur-
chases and other transactions. In each case,
as predicted, respondents report a less strong
preference for transacting with kin or friends
when purchasing furniture than when buying
cars, homes, or services. The other predic-
tions-that respondents' preferences for
within-network transaction partners would
be stronger for home purchases than for car,
legal-service, or home-maintenance transac-
tions-received no support.
In striking contrast to the behavioral evi-
dence, the preference data provide strong
support for the uncertainty hypothesis: All
eight predicted differences reach statistical
significance. Comparisons of home pur-
chases to legal-service and home-mainte-
nance-service transactions are of special in-
terest because the frequency and uncertainty
hypotheses lead to contradictory expecta-
tions. Whereas the behavioral data support
the frequency hypothesis, the preference data
support the uncertainty hypothesis. Across
the board, then, the more uncertain the trans-
action and the greater the degree of perfor-
mance uncertainty, the more people prefer
transaction partners with whom they have a
social tie.
Tests of Hypothesis 3: Buyer Role versus
Seller Role
Split samples were asked to assume the roles
of buyers or sellers of bedroom furniture, a
car, or a home. Hypothesis 3 was tested by
comparing the percentage of buyers and sell-
ers who expressed a preference for transact-
ing with social ties or strangers. The predic-
tion that buyers are more likely than sellers
to prefer dealing with friends or kin was sup-
ported for all three transaction types (Table
5 ) . The prediction that sellers prefer to trans-
act with strangers was supported for the two
transaction types (cars and homes) that en-
tail substantial uncertainty but not for the
sale of furniture, a result consistent with our
theoretical framework.
Is it realistic to expect friends and rela-
tives to behave less opportunistically than
strangers? Respondents were presented with
a scenario in which they were selling a car
that was in good repair but had had trans-
mission problems. They were asked whether
they would disclose that history to a poten-
tial purchaser. One-half of a split sample
SOCIALLY EMBEDDED CONSUMER TRANSACTIONS
Table 6. Buyer Satisfaction with Transaction by Presence of Tie to Seller: GSS, 1996
Percentage "Not So Satisfied"
Degrees of
Transaction Freedom No Tie
Used Cars 182 15.3
New Cars 203 4.7
Home 317 4.7
Legal services 64 1 17.3
Home maintenance 527 13.3
Note: Car transactions include only purchases from dealers, as the GSS did not ask about satisfaction
with purchases from individuals.
* p < .05 (one-tailed tests for significance of difference between percentages of buyers with and percent-
ages without ties to sellers)
was told that the purchaser was a stranger
and the other half was told that the buyer
was a relative. When the purchaser was a
stranger, 27 percent reported that they
would probably not or definitely not men-
tion the transmission problems, compared to
14 percent if the purchaser was a relative.
Although the difference is statistically sig-
nificant, it is not large, and most respon-
dents in both situations said they would
probably or definitely disclose the problem.
Some respondents no doubt gravitated to the
socially desirable response. Unless those
selling to a stranger exaggerated less than
those selling to a relative, however, the dif-
ference i s nontrivial from the standpoint of
buyers, who can reduce the risk of this
rather mild type of opportunistic behavior
by nearly 50 percent by keeping such trans-
actions within the family.
These patterns reflect a widespread per-
ception that persons in one's social network
are constrained to treat one more generously
and honorably than are strangers. Of GSS
respondents, 56 percent agreed and only 27
percent disagreed that people "usually get a
better price" from friends than from strang-
ers. Similarly, a survey of Seattle residents
revealed high levels of agreement with
statements that people one knows well are
more trustworthy than are strangers and are
more likely to provide help in time of need.
Moreover, most of the Seattlites agreed that
"I would feel more comfortable buying [a
used car] from a salesperson whom a friend
has introduced me to" rather than from a
stranger (Yamagishi and Yamagishi 1994:
154-55).
633
Percentage "Extremely Satisfied"
Tie Difference No Tie Tie Difference
5.0 10.3* 43.1 55.0 11.9*
8.3 3.6 59.2 50.0 9.2
1.6 3.1* 43.5 61.0 17.5*
11.8 5.5* 36.2 55.3 19.1*
4.7 8.6* 27.6 36.9 9.3'
Tests of Hypothesis 4: Satisfaction
We have demonstrated that people believe
that friends or relatives will give them better
terms in economic exchanges than will
strangers, that people act as if they believe
that they will do better as consumers in risky
exchanges if buyer-seller roles are embedded
in noncommercial social relations, and that
their preferences for exchange are consistent
with this view. Moreover, evidence from the
split-sample experiments confirms these re-
sults.
In light of these findings, we expect that
embedding transactions in social relation-
ships leads to more positive outcomes, as re-
flected in respondent reports of satisfaction
with goods and services. This expectation re-
ceives strong support (Table 6). Home pur-
chasers with ties to home sellers or realtors
are significantly more likely to report that
they are "extremely satisfied," and are less
likely to say that they are "not so satisfied"
with their purchases, than are those who
transacted with strangers. Purchasers of
home-maintenance services are significantly
more likely to express great satisfaction, and
are significantly less likely to express dissat-
isfaction, if their service provider was a net-
work member. The same is true for purchas-
ers of legal services: 55.3 percent of within-
network transactors but just 36.2 percent of
out-of-network transactors were "extremely
satisfied" with the services they received;
and people who had social ties to their law-
yers were significantly less likely than
people who did not to say they were "not so
satisfied" with the results. The hypothesis

was confirmed as well in the "market for
lemons" (Akerlof 1970): Of people who
bought used cars from dealers, 15.3 percent
without ties but only 5.0 percent with ties
describe themselves as "not so satisfied."
The pattern of results is also consistent
with our theoretical framework in that the
hypothesis was rejected only for new-car
purchases, the transaction with the lowest
risk in terms of frequency and uncertainty.
And it was most strongly supported for ser-
vice transactions, which are characterized by
risk-bearing performance uncertainty. More-
over, embedding relationships in social ties
appears particularly useful for reducing
downside risk, lessening dissatisfaction by
approximately one-third in legal-service
transactions, by two-thirds in home pur-
chases and used-car sales, and by almost
three-quarters for home-maintenance ser­
vices.
Why Would Anyone Not Prefer to Buy
from a Friend?
Some insight into this paradox is provided by
responses to two other GSS items. Although
5 6 percent of respondents agreed that
"people usually get a better price for goods
or services when they get them from friends
than when they deal with strangers," 23 per-
cent disagreed and another 21 percent were
uncertain. And 73 percent agreed that when
friends buy or sell something to friends, "dis-
cussing price is usually awkward or puts
somebody on the spot." Both social discom-
fort and uncertainty as to outcome may lead
some people to avoid transactions with
friends, even when they stand to benefit.
DISCUSSION
This is the first study of social ties between
buyers and sellers that is based on a national
sample. It demonstrates that economic
sociology's view of markets as "socially em-
bedded" (Granovetter 1985) is applicable to
consumer markets. The prevalence of preex-
isting social relationships between consum-
ers and the people who sell them cars or
homes, staff the real-estate agencies or car
dealerships they patronize, provide them
with legal services, and repair their homes
confirms sociology's expectation that con-
AMERICAN SOCIOLOGICAL REVIEW
sumer markets are intensely social and indi-
cates that the social organization of con­
sumer markets deserves scholarly attention.
Specifically, we demonstrate that insights
from the economics of organization
(Williamson 1985) are of substantial value in
explaining the extent to which different
kinds of ties are embedded in social rela-
tions. The data provide strong support for the
view that individual consumers use social
networks in much the same way as firms use
hierarchy: as alternative governance struc-
tures for transactions for which impersonal
market relations provide inadequate protec-
tion against opportunistic behavior. In this
view, the greater the risk in a transaction-
that is, the greater the advantages that infor-
mation asymmetry and asset specificity be-
stow on sellers and the greater the seller's
inclination to exploit those advantages-the
greater the likelihood that buyers will prefer
dealing with people to whom they have so-
cial ties outside the transaction itself. Trans-
acting with social contacts is effective be-
cause it embeds commercial exchanges in a
web of multiplex relations that extend over
space and time, in effect holding the seller's
network hostage to appropriate role perfor-
mance in the economic exchange.
Respondents' reports about their purchases
of homes, cars, legal services, and home-
maintenance services are consistent with the
view that the greater the frequency of a trans-
action (and therefore the greater the extent
to which market incentives can control op-
portunism), the less common are within-net-
work exchanges. Responses to questions
about preferences for in-group exchanges
support the argument that product and per-
formance uncertainty (i.e., information
asymmetries favoring sellers) lead people to
prefer to buy products and services from pro-
viders to whom they are socially connected.
These central results are fortified by a
wide range of supporting evidence. People
believe that their friends give them better
terms of trade than do strangers; and they are
more inclined to withhold product informa-
tion from strangers than from family mem-
bers. Sellers prefer to avoid selling to social
contacts under the same conditions that lead
buyers to seek such transactions. People who
have purchased goods and services from
friends and relatives report greater satisfac-
SOCIALLY EMBEDDED CONSUMER TRANS
tion and less dissatisfaction with the results
than do people who engaged in commercial
transactions with strangers, and the differ-
ences were greatest for transactions with the
greatest uncertainty. This accumulation of
evidence suggests that our theoretical frame-
work possesses quite general applicability.
We also raised some questions that we
could not resolve. One such question con-
cerns the contrast between the behavioral
data's support for the frequency hypothesis
and the preference data's support for the un-
certainty hypothesis. To be sure, this contrast
is less anomalous than it appears, as the two
views index complementary processes within
one theoretical framework, not alternative
explanatory models. Moreover, the behav-
ioral results were strongest for private sales,
which were not addressed by the preference
questions to sellers. Presumably, if the pref-
erence questions had asked respondents
about purchases from individuals rather than
businesses, the behavioral and preference re-
sults would have been more similar.
Even so, the strong tendency of respon-
dents taking the purchaser role to prefer to
work with attorneys and home-maintenance
contractors to whom they have noneconomic
ties is striking and is inconsistent with the
behavioral reports. These results cannot be
attributed to differing availability of ties, for
private-practice lawyers and home-mainte-
nance workers are, respectively, the scarcest
and most numerous of our occupational
groups.
The inconsistency between preferences
and behavior probably reflects two factors.
The first has to do with the temporal dimen-
sions of consumer choice. Many people hire
lawyers when they are in trouble or obtain
home-maintenance services when something
is broken, and therefore they cannot control
the timing of their purchase. By contrast, we
suspect that in many car or home sales be-
tween friends or relatives, the buyer's de-
mand for the good is stimulated by his or her
knowledge of its availability. Even for sales
of used cars through dealers or homes
through realtors, personal contacts may pro-
vide inside information about a particularly
attractive deal to a buyer who is not actively
"in the market." Purchasers of services rarely
have the luxury of waiting for a known pro-
vider to come to them.
A second factor concerns the structure of
the questions: A respondent asked to imag-
ine purchasing a home or car is likely to vi-
sualize an attractive good, and the actual pro-
cess of exchange may remain in the back-
ground. By contrast, a question evoking a le-
gal-service or home-maintenance transaction
necessarily entails a representation of the
service providers themselves and may prime
the respondent's perception of risk in a more
realistic manner.
A more important limitation of the analy-
sis is that it explains variation across trans-
actions and does not address variation across
persons-which, we argue, requires a differ-
ent theoretical framework and different ana-
lytic methods. Many people buy homes and
used cars from strangers, or hire attorneys or
electricians who are not recommended by
their kin, friends, or acquaintances. Such de-
viations from apparent rationality are not just
second-best solutions adopted by people with
impoverished social networks: Roughly 15 to
20 percent of each of the GSS subsamples
express preferences for buying from strang-
ers and selling to friends, respectively-pref-
erences that are plainly irrational in terms of
logic set out above. To explore such indi-
vidual differences requires a theoretical
framework that focuses less on how indi-
viduals apply standardized principles of ra-
tional action and more on variation among
persons in their understandings of incentives
and risks (Dobbin 1994). The strategic fac-
tors to which we call attention constitute
only one of two mechanisms that influence
the extent of within-network exchange. The
other, variation in the extent to which people
participate in systems of generalized reci-
procity, is not relevant to differences among
transaction types but may be highly pertinent
to explaining variation among persons.
The GSS module is a uniquely valuable
but imperfect resource for scholars interested
in these questions. An ideal data set would
include direct measures of key variables not
included in the GSS data: price, exchange
frequency, perceived risk, and network size
and composition. Data on sets of transaction
types that vary more in uncertainty, asset
specificity, and cost would be valuable, as
would designs (perhaps using factorial meth-
ods) that systematically manipulate transac-
tion attributes.

Further research on the relationship be-
tween within-network exchange and formal
institutions would also be desirable (Zucker
1986). In the GSS data, realtors seem to be
functional alternatives to within-network ex-
changes. How might behavior respond to
variation in state "lemon laws" or real-estate
market regulations?
Finally, interpreting the GSS data some-
times required heroic assumptions about the
way in which respondents perceived the
world. Because little research has been un-
dertaken on consumer markets, systematic
interviewing and ethnographic research
would provide valuable input into theory de-
velopment and research design.
Understanding the role of social ties in con-
sumer relations can provide insight into other
social-scientific questions. Zelizer (1994,
chap. 3) has analyzed the ways that ex-
changes of monetary gifts define and build
relationships. Certain ostensibly commercial
transactions probably operate the same way.
Once we understand the conditions under
which people engage in commercial transac-
tions with their friends, we can begin to un-
derstand more fully the way that markets con-
tribute to, as well as erode, social solidarity.
Economists have been puzzled by the de-
gree of price heterogeneity in markets for
consumer goods and services (Becker 1991).
Research on the role of social networks sug-
gests that some price variation may reflect
not only interpersonal variation in the pos-
session of information, but also heterogene-
ity across transactions in buyer-seller rela-
tionships. Presumably, under conditions that
have yet to be specified, apparent deviations
from equilibrium prices may represent either
quasi-insurance costs to buyers, investments
in long-term relationships by either party, or
other moves in systems of dyadic or general-
ized reciprocity.
Economists also have sought to understand
institutions such as warranties and consumer
protection laws as responses to market im-
perfections (Furubotn and Richter 1997:226-
27). Recognizing within-network exchange
as an alternative governance structure for
consumer relationships may alter conclusions
about the costs and benefits of institutional
responses and suggest additional reasons for
variation in the practices of sellers serving
different market segments or client bases.
AMERICAN SOCIOLOGICAL REVIEW
Our results provide a useful beginning to
this agenda. They should at least convince
readers that the phenomenon of within-net-
work exchange is substantively important
and theoretically engaging, and that it de-
serves a larger share of economic sociolo-
gists' attention than it has received to date.
Paul DiMaggio is Professor of Sociology and
Chair of the Sociology Department at Princeton
University, and Research Coordinator of
Princeton's Center for Arts and Cultural Policy
Studies. Current research interests include iden-
tifying the social location of homines economici,
emerging changes in the structure of firms, so­
cial division in the U.S. as revealed in both so-
cial and cultural attitudes and in public conflicts
over the arts and media, and the relationship be-
tween trends in cultural participation and
changes in family structure and gender roles.
Hugh Louch is a graduate student at Princeton
University and a research associate at the Citi-
zens' Housing and Planning Council in New York
City. He is currently studying land-use policy in
New York.
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