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Social Capital: A Double-Edged Sword

Author

Listed:
  • Harold L. Cole

    (Department of Economics, University of Pennsylvania, and NBER)

  • Dirk Krueger

    (Department of Economics, University of Pennsylvania, CEPR and NBER)

  • George J. Mailath

    (Department of Economics, University of Pennsylvania, and RSE, Australian National University)

  • Yena Park

    (Seoul National University)

Abstract

We analyze efficient risk-sharing arrangements when coalitions may deviate. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any deviating coalition rely on a belief in future cooperation which we term \social capital". We treat the contracting conditions of original and deviating coalitions symmetrically and show that higher social capital tightens incentive constraints since it facilitates both the formation of the original as well as a deviating coalition. As a consequence, although social capital facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of social capital and equilibrium allocations might feature resource burning or utility burning: social capital is indeed a double-edged sword.

Suggested Citation

  • Harold L. Cole & Dirk Krueger & George J. Mailath & Yena Park, 2021. "Social Capital: A Double-Edged Sword," ECONtribute Discussion Papers Series 064, University of Bonn and University of Cologne, Germany.
    • Handle: RePEc:ajk:ajkdps:064
    as

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    File URL: https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_064_2021.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Financial Coalition; Limited Enforcement; Risk Sharing; Coalition-Proof Equilibrium;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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