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Social capital, government expenditures, and growth

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 Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 1307.

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Date of creation: Feb 2012
Date of revision: Jul 2014
Handle: RePEc:upf:upfgen:1307
Contact details of provider: Web page: http://www.econ.upf.edu/

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