ABSTRACT
This study investigates the lifecycle of social capital formation at the individual level. A dynamic model is developed that analyzes individuals’ decision making about social capital accumulation that incorporates characteristics specific to social capital. The structural parameters of the model are estimated that address a variety of social capital issues.
Theoretical Model
The notion that people build up a network of friends (stock of social capital) by spending time in interacting with others (investment in social capital) is conducive to a neoclassical treatment. The model proposes a two-part return specification where, as distinct from the usual lagged return from stocks, social capital has an instantaneous return in the form of a direct utility accrued from the investment activity itself. The model allows for both the opportunity cost of time and depreciation rates to vary over the lifecycle. When parameterized the model can generate a variety of time paths of interest and allows for comparative dynamic exercises by perturbing parameter values.
Econometric Model
The structural parameters of the model are estimated using the method of simulated moments where matching is done using a GMM-type minimum distance estimation procedure. The data set used is from the General Social Survey (1972-2002). Chi-square statistics are calculated to test various restrictions to determine whether the parameter estimates are different among different groups.
Results and Findings
This study finds that social capital does depreciate and this depreciation rate varies over the lifecycle. The stylized fact of existing research that the time path of the stock of social capital has an inverted U-shape is not supported. Net benefits are higher for people with more education and which leads them to invest more in social capital despite having a higher opportunity costs of investment. This resolves a paradox that previous research could not explain. When comparative investigation is done for groups of different city sizes – city, suburb, and small rural areas – the observed differences can be traced back to different components of costs and benefits of social capital investment.