Social Capital, Cooperation, and Human Capital

Joint with: Applied Micro Theory

In this paper I study the formation of social capital and its effects in a

game theoretic setting. I formalize the concept of social trust and show that appropriate social trust enables strangers to cooperate in a one-period prisoner’s

dilemma. The relationship between several widely used forms of social capital is characterized. The analysis also sheds lights on the strong externality of the social component of human capital among people and suggests an important

link between human capital and social capital. Social trust is determined in equilibrium by the aggregate choices of optimizing individual players. Multiple equilibria are possible, which implies that social capital levels may be history dependent. Those people with highest investment costs play a crucial role in determining whether there exists under-investment in social trust. The model suggests several ways to improve long run social trust. It provides new insights in the complex relationship between formal institutions and social capital. It also shows the importance of families, schools, and mass media in affecting

the formation of social trust in the society. The paper provides some plausible explanations for many stylized facts in the empirical literature on social capital.

For more information, contact Jere Behrman.