Bryan R. Routledge / Carnegie Mellon University

	Endogenous Social Capital
	Bryan R. Routledge, Carnegie Mellon University Joachim von Amsberg, The World Bank
	April 1996 Working Paper
	ABSTRACT A simple model is provided to define and characterize Coleman's (1990) important concept of social capital. Like the physical, human and technological forms of capital, social capital can significantly impact welfare. Social capital is important because the social structure affects the coordination and cooperation of economic activity. The model considers agents who maximise their lifetime gains to trade. Each trade between two members of a community has the structure of the prisoners' dilemma. Trades are repeated indefinitely, but not necessarily each period. Social capital is defined as the social structure which yields cooperative trade as an equilibrium. In particular, social capital relates to the frequency that any two agents meet. Examples are presented which demonstrate that increasing opportunities for trade can leave all agents worse off since the increased anonymity (decreased frequency) of each transaction destroys social capital and the cooperative trade equilibrium. Our model captures many of the important features of social capital including its public good nature which typically leads to an under-investment in, or under-valuation of, social capital.
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