The economic value of social capital

Empirical studies on the importance of social capital for poor households show divergent outcomes. This divergence may stem from the lack of a conceptual framework for capturing the social capital dimensions that deliver economic value to individuals. The purpose of this paper is to define individual social capital from an economic perspective and propose a measurement based on two dimensions of individual social capital that bring economic value to individuals, i.e. informal risk insurance arrangements and information advantages arising from personal social networks.

The authors first provide a concrete definition of individual social capital and identifying social capital dimensions that are important from an economic perspective (i.e. dimensions that bring economic value to the individual). Next, the authors develop a new conceptual framework around this definition and propose a social capital measurement. Finally, the authors apply this measurement numerically to demonstrate that differences in the network configurations between individuals lead to asymmetry of social interactions between these individuals.

The authors show that the exchange of resources between two individuals is affected by their individual network configurations. In particular, the authors show that differing network configurations drive asymmetrical social interaction between individuals.

The approach may be especially relevant for understanding of the persistence of poverty and inequality in developing economies. These economies are characterized by environments in which imperfect information, underdeveloped or non-existent formal institutions and limited contract enforcement abound and where social capital may therefore be important to facilitate economic transactions. In particular, the authors see clear applications of the approach in better understanding and improving the use of microfinance programs.