Social Capital and Growth

We define and characterize social capital in a simple growth model. We capture social capital in a model where individuals in a community maximize their lifetime gains to trade. Each trade between two members of a community has the structure of the prisoners’ dilemma. Trades are repeated indefinitely, but not necessarily each period. Social capital is defined as the social structure which facilitates cooperative trade as an equilibrium. The trading model is incorporated into a growth model to explore the connections between growth, labor mobility, and social capital. The key assumption is that technological innovation, which drives growth, involves a reallocation of labor that affects social capital. Modifying the responsiveness of labor to a technological shock, has implications for both labor efficiency and social capital.