DP9891 Social Capital, Government Expenditures, and Growth

Author(s): Giacomo AM Ponzetto, Ugo Troiano
Publication Date: March 2014
Date Revised: May 2018
Keyword(s): Economic Growth, Education Expenditures, Elections, Government Expenditures, Imperfect Information, Social Capital
JEL(s): D72, D83, H52, I22, I25, O43, Z13
Programme Areas: International Macroeconomics, Public Economics, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9891

This paper shows that social capital increases economic growth by raising government investment in human capital. We present a model of stochastic endogenous growth with imperfect political agency. Only some people correctly anticipate the future returns to current spending on public education. Greater social diffusion of information makes this knowledge more widespread among voters. As a result, we find it alleviates myopic political incentives to underinvest in human capital, and it helps the selection of politicians that ensure high productivity in public education. Through this mechanism, we show that social capital raises the equilibrium growth rate of output and reduces its volatility. We provide evidence consistent with the predictions of our model. Individuals with higher social capital are more informed about their government. Countries with higher social capital spend a higher share of output on public education.