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Social Capital vs Institutions in the Growth Process

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Ahlerup, Pelle & Olsson, Ola & Yanagizawa, David, 2007. "Social Capital vs Institutions in the Growth Process," Working Papers in Economics 248, University of Gothenburg, Department of Economics.
    • Handle: RePEc:hhs:gunwpe:0248
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    File URL: http://hdl.handle.net/2077/3140
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    References listed on IDEAS

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    1. Zak, Paul J & Knack, Stephen, 2001. "Trust and Growth," Economic Journal, Royal Economic Society, vol. 111(470), pages 295-321, April.
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    5. La Porta, Rafael, et al, 1997. "Trust in Large Organizations," American Economic Review, American Economic Association, vol. 87(2), pages 333-338, May.
    6. Edward L. Glaeser & Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer, 2004. "Do Institutions Cause Growth?," Journal of Economic Growth, Springer, vol. 9(3), pages 271-303, September.
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    More about this item

    Keywords

    social capital; institutions; growth; investment;
    All these keywords.

    JEL classification:

    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development

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