DP14333 Social Capital: A Double-Edged Sword
|Author(s):||Harold Cole, Dirk Krueger, George J Mailath, Yena Park|
|Publication Date:||January 2020|
|Date Revised:||February 2021|
|Keyword(s):||Coalitions, Limited Commitment, Risk Sharing|
|Programme Areas:||Public Economics, International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=14333|
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.