Discussion Paper Details

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Title: Social Capital: A Double-Edged Sword

Author(s): Harold Cole, Dirk Krueger, George J Mailath and Yena Park

Publication Date: January 2020

Keyword(s): Coalitions, Limited Commitment and Risk Sharing

Programme Area(s): International Macroeconomics and Finance, Macroeconomics and Growth, Monetary Economics and Fluctuations and Public Economics

Abstract: We analyze efficient risk-sharing arrangements when coalitions may deviate. Coalitions form to insure against idiosyncratic income risk. Self-enforcing contracts for both the original coalition and any deviating coalition rely on a belief in future cooperation which we term "social capital''. We treat the contracting conditions of original and deviating coalitions symmetrically and show that higher social capital tightens incentive constraints since it facilitates both the formation of the original as well as a deviating coalition. As a consequence, although social capital facilitates the initial formation of coalitions, the extent of risk sharing in successfully formed coalitions is declining in the extent of social capital and equilibrium allocations might feature resource burning or utility burning: social capital is indeed a double-edged sword.

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Bibliographic Reference

Cole, H, Krueger, D, Mailath, G and Park, Y. 2020. 'Social Capital: A Double-Edged Sword'. London, Centre for Economic Policy Research.