The Economic Value of Social Capital

TLDR: In this paper, the authors define individual social capital from an economic perspective and propose a measurement based on two dimensions of social capital that bring economic value to individuals, i.e. informal risk insurance arrangements and information advantages arising from personal social networks.

Abstract: 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.

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University of Groningen
The Economic Value of Social Capital
Postelnicu, Lumimnita; Hermes, Niels
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Publication date:
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Citation for published version (APA):
Postelnicu, L., & Hermes, N. (2017).
The Economic Value of Social Capital
. (SOM Research Reports; No.
17006-EEF). University of Groningen, SOM research school.
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Download date: 10-08-2022

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Luminita Postelnicu
Niels Hermes
17006-EEF
The Economic Value of Social Capital

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SOM RESEARCH REPORT 12001

3
The Economic Value of Social Capital
Luminita Postelnicu
Solvay Brussels School of Economics and Management (SBS-EM), Université Libre de
Bruxelles
Niels Hermes
University of Groningen, Faculty of Economics and Business, Department of Economics,
Econometrics and Finance, The Netherlands
c.l.m.hermes@rug.nl

1
The Economic Value of Social Capital
Luminita Postelnicu
Solvay Brussels School of Economics and Management (SBS-EM), Université Libre de Bruxelles
Niels Hermes
Faculty of Economics and Business, University of Groningen
Solvay Brussels School of Economics and Management (SBS-EM), Université Libre de Bruxelles
Abstract
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. This paper defines
individual social capital from an economic perspective and proposes a measurement based on
the 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. Using this measurement, we present a numerical application to argue that differing
network configurations drive asymmetry of social interactions among individuals. (102
words)
Key words: Social capital; socio-economics; networks, economic development
JEL Classification Codes: Z13, O17, D8
Acknowledgements: The authors would like to thank Johan Bastiaensen, Solene Morvant-Roux, Marek Hudon,
Arian Szafarz and the participants of the 2014 Annual International Conference of the Research Group on
Development Economics, Passau, Germany, and the 2015 European Research Conference on Microfinance
(ERCM), Geneva, Switzerland, for their valuable comments on earlier versions of the paper
Corresponding author: Niels Hermes, Faculty of Economics and Business, University of Groningen, Nettelbosje
2, 9747 AE Groningen, the Netherlands; P: +31-50-3634863; E: c.l.m.hermes@rug.nl

Frequently asked questions

Q1. What have the authors contributed in "The economic value of social capital" ?

This divergence may stem from the lack of a conceptual framework for capturing the social capital dimensions that deliver economic value to individuals. This paper defines individual social capital from an economic perspective and proposes a measurement based on the 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. Using this measurement, the authors present a numerical application to argue that differing network configurations drive asymmetry of social interactions among individuals. 

Q2. What are the future works in "The economic value of social capital" ?

Future empirical researchers may use this approach to explain the role of individual social capital in shaping individual behavior. Future empirical economic research should take into account individuals ’ differing network positions ( i. e., their differing network configurations ) to explain their differing outcomes. The consequences of differentiating between these two types of bridging ties may be considered in future research, however. Future research may investigate the consequences of allowing individuals to have outside credit for the outcomes presented in the paper. 

Q3. What is the extent to which binding ties are able to help an individual overcoming an?

The extent to which binding ties are able to help an individual overcoming anidiosyncratic shock depends on the capacity of the ties to produce and provide resources. 

Q4. What is the third layer of social capital?

The third (outer) layer refers to the entire community, which provides members with asense of belonging, even though they may not interact directly. 

Q5. How many ties do individuals have to have to deal with idiosyncratic?

In other words, individuals’ capacities to cope with idiosyncratic shocks depend on the number of their binding ties, as well as on the content (i.e., the amount of redistributable resources) of those ties. 

Q6. What is the reason why the affected individual will lose expected future reciprocity?

Not only will deviant (i.e. non-supporting) individuals lose expected future reciprocity from the affected individual, other members will also suffer because the affected individual will not be able to reciprocate as expected. 

Q7. What is the simplest assumption to make to show how different network configurations determine asymmetry?

To show how differing network configurations determine asymmetry of social interactions, the authors make the following three assumptions to endogenize the other dimensions of individual social capital measurement (i.e., the strength of ties between two individuals, individuals’ stocks of redistributable resources, and the strength beyond which a tie is expected to act as an informal risk insurance device):Assumption 1: The strength of dyadic ties is symmetrical: = . 

Q8. What is the definition of bridging ties?

Only bridging ties (i.e., weak ties linking individuals from different network segments) facilitate access to new and non-redundant information (Granovetter, 1973, 1983; Lin, 1986). 

Q9. What would result in higher (and unequal) access to resources?

This would result in higher (and unequal) access to resources, leading to increased asymmetries between individuals in terms of their capacities to cope with shocks, as well as their capacities to build and maintain personal networks. 

Q10. What is the strength of the dyadic tie between i and j?

As denoted previously, is the strength of the dyadic tie between individuals i and j; it can vary from 0 (no tie) to 1 (very strong tie), that is, 0 ≤ ≤ 1; denotes the resources that individual i is currently able to redistribute within i’s network. 

Q11. Why do people make transfers toward members of their informal risk insurance arrangements?

Individuals willingly make transfers toward members of their informal risk insurance arrangements to maintain the arrangements because they may need them in cases of future shocks. 

Q12. How many units of redistributable resources do individuals have?

the asymmetrical exchange of resources occurs because a distributes a stock of 80 units of redistributable resources between individuals b, c,and d, according to their respective tie strengths of 1.0, 0.9, and 0.4 respectively. 

Q13. How many units of redistributable resources do the two individuals have?

According to the assumptions, the two individuals have a tie of symmetrical strength and possess an identical amount of redistributable resources (i.e. 80 units).