Building Up Social Capital in a Changing World: A Network Approach

41 Pages Posted: 1 Aug 2003

See all articles by Fernando Vega-Redondo

Fernando Vega-Redondo

Universidad de Alicante - Department of Economic Analysis; European University Institute; Bocconi University

Date Written: June 2003

Abstract

This paper models the dynamic process through which a large society may succeed in building up its "social capital" by establishing a stable and dense pattern of interaction among its members. In the model, agents interact according to a collection of infinitely repeated Prisoner's Dilemmas played on the current social network. This network not only specifies the playing partners but, crucially, also determines how relevant strategic information diffuses or new cooperation opportunities are found. Over time, the underlying payoffs randomly change, i.e. display some "volatility", which leads agents to react by creating new links and removing others. The process is ergodic, so we use numerical simulations to "compute" its long-run invariant behavior and obtain the following conclusions: (a) Only if payoff volatility is not too high can the society sustain a dense social network. (b) The social architecture endogenously responds to increased volatility by becoming more cohesive. (c) Network-based strategic effects are an essential buffer that preclude the abrupt collapse of the social network in the face of growing volatility. These conclusions, largely in tune with those of the social-capital literature, are further studied analytically in a companion paper through the use of mean-field techniques.

Keywords: Social Capital, Prisoner's Dilemma, Search, Social Networks, Volatility

JEL Classification: C72, D74, D83

Suggested Citation

Vega-Redondo, Fernando and Vega-Redondo, Fernando and Vega-Redondo, Fernando, Building Up Social Capital in a Changing World: A Network Approach (June 2003). Available at SSRN: https://ssrn.com/abstract=428023 or http://dx.doi.org/10.2139/ssrn.428023

Fernando Vega-Redondo (Contact Author)

Universidad de Alicante - Department of Economic Analysis ( email )

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Bocconi University ( email )

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