Social Capital and Economic Growth
Abstract: This paper presents a new framework to analyze the dynamic relationship between social capital and economic growth. This relationship has been analyzed in a variant of quality-ladder growth model. We consider three institutional environments: first, perfect and costless institutions, second, social capital is the only form of institutions and third, both social capital and formal institutions determine the strength of institutions. We characterize an equilibrium in which a higher level of social capital increases growth but higher growth itself weakens social capital by increasing labor reallocation rate and by reducing socialization time. We show that in the absence of formal institutions, a higher rate of innovation lowers R&D investment by weakening existing informal institutions highlighting the need to improve formal institutions. A poor country lacking in resources or will to develop formal institutions will be caught up in poverty trap even if they transplant the technologies of rich countries. The model, therefore, provides another explanation of why poor countries do not catch up.