Essays on Social Capital and Economic Growth

Abstract

Thesis (Ph.D.)--University of Washington, 2012In this thesis we present three models to analyze the dynamic relationship between social capital and economic growth. Throughout it is assumed that social capital increases with socialization while it decreases with labor migration. We consider two channels through which social capital affects the economy. First, social capital affects the innovation process (Chapter 2 and 3) and second, it affects the output (Chapter 3). It has also been assumed that the same objective can also be achieved by improving appropriate formal institutions but doing so is costly. Chapter 1 introduces the topic and discusses related literature. Chapter 2 presents a simple model and shows that in the absence of formal institutions, a higher rate of innovation lowers R&D investment as it weakens the existing informal institutions. Social capital declines due to a decline in socialization time and also because of an increase in the labor migration rate. As a result, rise in the rate of growth rate is lower that what would be predicted by a standard growth model (benchmark case). We show that formal institutions need to be developed in response to new technological breakthrough because of its detrimental impact on social capital. Chapter 3 extends the model by adding physical capital into the model and analyzes alternative ways to finance a chosen level of expenditure on formal institutions. We find that financing through lump sum tax is growth maximizing, however, tax on consumption results in highest improvement in welfare. In the case where social capital affects output directly (Chapter 4), we analyze the impact of increase in the rate of innovation and an exogenous improvement in formal institutions financed by lump-sum tax. We find that while both shocks increase the rate at which the economy grows and decrease the stock of social capital; productivity adjusted physical capital and R&D investment declines when innovation rate goes up while they increase when the formal institutions are improved. They both result in long-run welfare gain. More effective formal institutions result in even higher economic growth and long-run welfare gain