Institutions, the social capital structure, and multilevel marketing companies

Summary of JOIE article (First View, 14 July 2020) by Jordan K. Lofthouse, The Mercatus Center at George Mason University and Virgil Henry Storr, Department of Economics, George Mason University. The complete article is available on the JOIE website.

In multilevel marketing companies (MLMs), also known as network marketing or direct selling, member-distributors earn income both from selling products and recruiting new members (Sparks and Schenk, 2001; Liu, 2018). Like any enterprise, MLM participants engage in risk, and there is no guarantee that distributors in MLMs will make profits. Many MLMs have been criticized for being similar to pyramid schemes, which results in the majority of participants making negative profits (Keep and Vander Nat, 2014; FTC, 2009). 

Despite the risks, MLMs are a popular form of enterprise in Utah, which has become a hub for MLMs. Evidence suggests that Utah has a disproportionate share of MLM companies located in the state and a disproportionate number of Utah residents participating in the companies (Team Business for Home, 2017; Lindsey, 2016; Mencimer, 2012; Canham, 2011; Taylor, 2012). Roughly one in five Utah households has participated in an MLM at some point during their lifetime (Taylor, 2004). For comparison, roughly one in thirteen adults in the United States has participated in at least one MLM during their lifetime (DeLiema et al., 2018). 

The popularity of MLMs in Utah raises a number of questions. Specifically, what explains the prevalence of and high participation rates in MLMs in Utah? Do religious institutions and social capital structures play a role in explaining the popularity of MLMs in the state? 

Our argument is that the unique and dominant religious institutions in Utah have led to the emergence of a social capital structure that makes MLMs particularly viable. Our paper provides a conceptual framework and outlines general propositions that allow us to identify how institutions and social capital structures are related, how social capital structures affect MLM prevalence and performance, and how LDS institutions affect social capital structures and MLM participation in Utah. 

First, institutions shape the social capital structure of a community, and institutional variation produces variation in social capital structures. Institutions, especially religious institutions, shape social capital structures and economic action (Iannaccone, 1998; Iyer, 2016). Not all forms of social capital are alike. Like physical capital, social capital is structural in nature because both forms of capital are heterogeneous and multi-specific (Chamlee-Wright, 2008). Social capital is heterogeneous because it cannot be reduced to one measurable stock; it is a complex structure made up of “community norms, social networks, favors given and received, potluck suppers, book groups, church bazaars, and neighborhood play groups” (Chamlee-Wright, 2008: 44). Social capital is multi-specific because its particular forms can be useful for various, but not an infinite, number of uses.

Second, some social capital structures are more conducive to specific social actions or enterprises compared to other social capital structures. Social capital can exist in many different contexts, but the qualities and characteristics of social capital will vary depending on the context. One form of social capital will be useful for the production of certain types of goods or engaging in certain types of activities, but that same form of social capital may not be useful in every circumstance. Thus, the social capital that facilitates certain types of activities may not facilitate other types of activities.

Third, successful MLMs depend on a social capital structure of bonding, bridging, and linking social capital that allows member-distributors to leverage both strong and weak ties characterized by trust and reciprocity. MLM participants must have access to social connections outside of their inner circle of friends to engage in direct selling and to recruit new sub-distributors, otherwise they are unlikely to make profits and continue participation in MLMs. To be successful, MLM member-distributors must continually recruit new member-distributors from among their social connections who have largely distinct, non-overlapping social networks.

Thus, MLMs thrive in Utah, in part, because the LDS Church’s institutions create a unique social capital structure that can be leveraged by members as they engage in MLMs. Utah is the most religiously homogeneous state. In 2018, 47 percent of the state’s population identified as members of the Church of Jesus Christ of Latter-day Saints (hereafter, LDS Church), also known as the Mormon Church (PRRI, 2018). Utah also has one of the highest religious participation rates and has a relatively high proportion of women outside the traditional labor force (Liu, 2018). 

Due largely to this religious homogeneity and high participation rates, Utah ranks first within the United States on social capital by some measures (‘The Geography of Social Capital in America’, 2018). In Utah, the ubiquitousness of Mormon institutions fosters a social capital structure where (almost all) members have access to social capital in all its forms—bonding, bridging, and linking. The LDS Church’s institutional rules strongly encourage members to make close social bonds with their neighbors and also to make meaningful connections characterized by trust and reciprocity with other church members in their region and across the world. 

The LDS-based social capital structure is conducive to successful MLMs because broad networks of social connections allow the member-distributors to sell products and recruit new members more effectively and efficiently. This LDS-Church-centered social capital structure, we believe, helps explain the disproportionate prevalence of and participation in MLM businesses in Utah.


References

Canham, M. (18 February 2011), ‘State of supplements: FTC drops direct sellers as target’, The Salt Lake Tribune

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Lindsey, D. (8 September 2016), ‘Follow the profit: How Mormon culture made Utah a hotbed for multi-level marketers’, KUTV.

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Taylor, J. (2004), ‘Who Profits from Multi-Level Marketing? Preparers of Utah Tax Returns Have the Answer’, Federal Trade Commission public comment, Retrieved from https://www.ftc.gov/system/files/documents/public_comments/2006/07/522418-12684.pdf

Taylor, J. (2012), ‘The Case (for and) against Multi-level Marketing’, Consumer Awareness Institute.

Team Business for Home. (12 June 2017), ‘Network Marketing The Second-Biggest Industry In Utah With $8.5+ Billion In Revenue’, Business for Home.

‘The Geography of Social Capital in America’ (2018), Social Capital Project, Prepared by the Vice Chairman’s Staff of the Joint Economic Committee at the request of Senator Mike Lee. SCP REPORT NO. 1-18. April 2018.

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