Why Invest In Social Connections?

A growing body of research is documenting a strong connection between ”social capital” – the degree to which individuals are socially linked – and a large number of desirable outcomes. Various researchers have argued that social capital causes good government, economic growth, physical well-being and happiness itself.

But where does social capital come from? And why do individuals put time and energy into creating formal and informal organisations? Writing in the latest issue of the Economic Journal, Professors Edward Glaeser, David Laibson and Bruce Sacerdote present evidence suggesting that a relatively simple analysis of investment decisionmaking can explain a large number of ”stylised facts” about who has social capital. For example, homeowners are likely to invest in social connections as well as in their property since there are clear benefits from a better quality local community.

In the view of these researchers, social capital can be thought of as a capital stock just like human capital (i.e., education) or physical capital. Individuals invest in capital when they expect the return to be high relative to the cost. This unsurprising claim leads to a number of predictions that are confirmed in the data:

  • Social capital levels, as measured by membership in organisations, rise and fall over the life cycle as young people invest and old people draw down their investment.
  • Social capital levels are high among people who invest in other forms of capital, such as human capital, presumably because these people are generally forwardlooking.
  • Social capital is higher among people whose jobs require personal connections and social skills.
  • Social capital is lower in places with high degrees of mobility or among people who are likely to move areas.
  • Short time horizons cause all forms of investment to be less attractive.
  • Homeowners are more likely to invest in social connections as well, which comes from the fact that house prices reflect some of the social gains from better communities.


”An Economic Approach to Social Capital” by Central Bank Transparency” by Edward Glaeser, David Laibson and Bruce Sacerdote is published in the November 2002 issue of the Economic Journal. Glaeser and Laibson are at Harvard University; Sacerdote is at Dartmouth College.

Bruce Sacerdote