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Middle-Class Consensus, Social Capital and the Mechanics of Economic Development

  • Josten, Stefan Dietrich

    ()

    (Helmut Schmidt University, Hamburg)

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    This paper analyzes a heterogeneous-agents endogenous-growth model incorporating both transaction costs and social capital. An individual can either become an active part of the society's middle-class networks of trust and mutual cooperation, thus making a positive contribution to overall social capital. Alternatively, the individual can stay socially disintegrated and free-ride on the community's social capital. Due to the existence of asymmetric information, agents face a moral-hazard problem on the credit market which gives rise to transaction costs and can be alleviated by private, governmental or social governance structures. An increase in inequality and shrinking of the middle class depresses the community's social capital, which, in turn, weakens the informal social governance system and increases economy-wide transaction costs. As a result a more unequal distribution lowers the economy's growth rate.

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    Paper provided by Helmut Schmidt University, Hamburg in its series Working Paper with number 36/2005.

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    Length: 33 pages
    Date of creation: Jan 2005
    Date of revision:
    Handle: RePEc:ris:vhsuwp:2005_036
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