Social Capital: A Double-Edged Sword

70 Pages Posted: 10 Jan 2020 Last revised: 9 Feb 2021

See all articles by Harold L. Cole

Harold L. Cole

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Dirk Krueger

University of Pennsylvania

George J. Mailath

University of Pennsylvania - Department of Economics; Research School of Economics, ANU

Yena Park

University of Pennsylvania - Department of Economics

Multiple version iconThere are 3 versions of this paper

Date Written: February 1, 2021

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.

Keywords: Financial Coalition, Limited Enforcement, Risk Sharing, Coalition-Proof Equilibrium

JEL Classification: E21, G22, D11, D91

Suggested Citation

Cole, Harold L. and Krueger, Dirk and Mailath, George J. and Park, Yena, Social Capital: A Double-Edged Sword (February 1, 2021). PIER Working Paper No. 20-002, Available at SSRN: https://ssrn.com/abstract=3516801 or http://dx.doi.org/10.2139/ssrn.3516801

Harold L. Cole

University of Pennsylvania - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Dirk Krueger (Contact Author)

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

George J. Mailath

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
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HOME PAGE: http://web.sas.upenn.edu/gmailath/

Research School of Economics, ANU ( email )

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Yena Park

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States

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