Social Capital as an Engine of Growth: Multisectoral Modeling and Implications

We propose an endogenous growth model incorporating social capital. Social capital serves only as an input in the production of human capital and it involves a cost in terms of the final good. In contrast to alternative specifications, this model ensures that social capital enhances productivity gains by playing the role of a timing belt that drives the transmission and propagation of all productivity shocks. We find that, depending on the measure of social capital, the elasticity of human capital with respect to social capital varies from 6% to 10%. Finally, we investigate the short-term dynamics and imbalance effect properties of the model, depending on the value of this elasticity. In particular, we show that when the substitutability of social capital for human capital increases, the economy is better equipped to surmount initial imbalances, as individuals may allocate more working time to the final good sector without impeding economic growth.