Social Capital, Endogenous Labor Supply, and Economic Development

Social capital has been increasingly recognized as an important determinant of economic growth in the literature of economic growth. Nevertheless, there are only a few rigorous dynamic growth models which explicitly deal with dynamic interdependence between social capital, physical capital, and economic structure. The purpose of this study is to incorporate social capital in a neoclassical economic growth theory. We propose a dynamic model with interdependence between economic structural change, wealth accumulation, and social capital accumulation. Social capital positively affects total factor productivities and is accumulated through investment, leisure activities, and production. We simulate the model. The study focuses on effects of changes in some parameters on the equilibrium and transitional processes of the economic dynamics. We get some insights through including social capital in economic growth modelling. For instance, if society has lower trust (possibly if we interpret social capital as guanxi in Chinese societies) which results in a rise in depreciation rate of social capital, the economy suffers from falling social capital, productivities, national capital, and national output; consumers have lower income, wealth, and consumption; they also have to spend more time on investing in social capital.