Social Capital and its Role in Production: Does the Depletion of Social Capital Depress Economic Growth?

We augment a Solow-Ramsey growth model by including: i) a labor-leisure choice, ii) social capital entering the production functions, iii) negative externalities affecting social capital and increasing with the level of activity, iv) the possibility for economic agents to substitute social capital with produced goods. It is shown that the erosion of social capital may lead to a higher steady-state level of activity. Hence, the possibility of substituting social capital in production functions may generate dynamics whereby agents compensate for negative externalities by increasing their labor supply and accumulation in order to increase the output used to substitute diminishing social capital. By so doing, they contribute further to the decline in social capital, which feeds back into the mechanism that induces agents to increase output. This result is at odds with the literature on social capital, which generally considers the latter to be an important growth-enhancing factor and its erosion as an obstacle to obtaining higher per-capita output.