Ahlerup, Pelle () (Department of Economics, School of Business, Economics and Law, Göteborg University) Olsson, Ola () (Department of Economics, School of Business, Economics and Law, Göteborg University) Yanagizawa, David () (Stockholm University)
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Is social capital always important for economic growth? A number of recent micro studies suggest that interpersonal trust and social capital will have its greatest impact on economic performance when court institutions are relatively weak. The conventional wisdom from macro studies, however, is that social capital is unconditionally good for growth. On the basis of the micro evidence, we outline an investment game between a producer and a lender in an incomplete-contracts setting. A key insight is that social capital will have the greatest e¤ect on the total surplus from the game at lower levels of institutional strength and that the effect of social capital vanishes when institutions are very strong. When we bring this prediction to an empirical cross-country growth regression, it is shown that the marginal effect of social capital (in the form of inter- personal trust) decreases with institutional strength. Our results imply that a one standard deviation rise in social capital in weakly institutionalized Nigeria should increase economic growth by 1.8 percentage points, whereas the same increase in social capital only increases growth by 0.3 percentage points in strongly institutionalized Canada.
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Paper provided by Göteborg University, Department of Economics in its series Working Papers in Economics with number
248.
Length: 42 pages Date of creation: 09 Mar 2007 Date of revision: Handle: RePEc:hhs:gunwpe:0248
Contact details of provider: Postal: Department of Economics, School of Business, Economics and Law, Göteborg University Box 640, SE 405 30 GÖTEBORG, Sweden Phone: 031-773 10 00 Web page: http://www.handels.gu.se/econ/ More information through EDIRC
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Find related papers by JEL classification: O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
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