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Building Up Social Capital in a Changing World: A Network Approach

  • Fernando Vega-Redondo

    (Departamento de Fundamentos del Análisis Económico and Instituto Valenciano de Investigaciones Económicas, Universidad de Alicante, Spain and Departamento de Economía i Empresa, Universitat Pompeu Fabra, Barcelona, Spain)

This paper models the dynamic process through which a large society may succeed in building up its “social capital” by establishing a stable and dense pattern of interaction among its members. In the model, agents interact according to a collection of infinitely repeated Prisoner’s Dilemmas played on the current social network. This network not only specifies the playing partners but, crucially, also determines how relevant strategic information diffuses or new cooperation opportunities are found. Over time, the underlying payoffs randomly change, i.e. display some “volatility”, which leads agents to react by creating new links and removing others. The process is ergodic, so we use numerical simulations to “compute” its long-run invariant behavior and obtain the following conclusions: (a) Only if payoff volatility is not too high can the society sustain a dense social network. (b) The social architecture endogenously responds to increased volatility by becoming more cohesive. (c) Network-based strategic effects are an essential buffer that preclude the abrupt collapse of the social network in the face of growing volatility. These conclusions, largely in tune with those of the social-capital literature, are further studied analytically in a companion paper through the use of mean-field techniques.

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Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2003.53.

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Date of creation: Jun 2003
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Handle: RePEc:fem:femwpa:2003.53
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  1. Ellison, Glenn, 1993. "Learning, Local Interaction, and Coordination," Econometrica, Econometric Society, vol. 61(5), pages 1047-71, September.
  2. Sanjeev Goyal & Fernando Vega-Redondo, 2003. "Network Formation and Social Coordination," Working Papers 481, Queen Mary University of London, School of Economics and Finance.
  3. M. Kandori & G. Mailath & R. Rob, 1999. "Learning, Mutation and Long Run Equilibria in Games," Levine's Working Paper Archive 500, David K. Levine.
  4. Kandori, Michihiro, 1992. "Social Norms and Community Enforcement," Review of Economic Studies, Wiley Blackwell, vol. 59(1), pages 63-80, January.
  5. Matthew Haag & Roger Lagunoff, 2000. "social Norms, Local Interaction and Neighborhood Planning," Levine's Working Paper Archive 2049, David K. Levine.
  6. Ellison, Glenn, 1994. "Cooperation in the Prisoner's Dilemma with Anonymous Random Matching," Review of Economic Studies, Wiley Blackwell, vol. 61(3), pages 567-88, July.
  7. Young, H Peyton, 1993. "The Evolution of Conventions," Econometrica, Econometric Society, vol. 61(1), pages 57-84, January.
  8. Vega-Redondo, Fernando, 2006. "Building up social capital in a changing world," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2305-2338, November.
  9. B. Douglas Bernheim & Michael D. Whinston, 1990. "Multimarket Contact and Collusive Behavior," RAND Journal of Economics, The RAND Corporation, vol. 21(1), pages 1-26, Spring.
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