Here is a link to an excellent piece by Bruce Hoppe
Snip:
The power of reputation rests on the idea of network closure, which is the degree to which everyone knows everyone else in a network. In a subgroup or "clique" where everybody knows everybody else, reputation can have currency much more powerful than money. Promises within the group can be trusted because the consequences of breaking a promise would be catastrophic. Anyone who mistreated a fellow member in such a group would quickly find himself ostracized by the entire group, his reputation ruined.
Within such a tight-knit group, the common trust becomes a valuable resource. With trust, fellow community members can engage in all kinds of everyday transactions without wasting time and energy ensuring protection from fraud. Without trust, each individual must look out for his own protection at every turn, relying on extensive research, legal contracts, and other safeguards.
So, we have seen that structural holes and network closure both provide value as different kinds of social capital. Structural holes, those gaps between groups, drive innovation. The tightly inter-conntected bonds of network closure promote trust through the power of reputation.
