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Social Capital, Government Expenditures, and Growth

  • Ponzetto, Giacomo AM
  • Troiano, Ugo

We present a tractable stochastic endogenous growth model that explains how social capital influences economic development. In our model, social capital increases citizens' awareness of government activity. Hence, it alleviates the electoral incentives to under-invest in education, whose returns are delayed and less visible to voters. In equilibrium, higher social capital raises the average output growth rate and reduces its volatility by increasing public investment in education while making its returns higher and less variable. Our theory also predicts that a more unequal distribution of social capital reduces public education expenditures. We provide suggestive cross-country evidence consistent with these predictions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9891.

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Date of creation: Mar 2014
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Handle: RePEc:cpr:ceprdp:9891
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