Working Papers

Social Capital, R&D, and Economic Performance: Theory and Evidence on Different Growth Models

(Social Capital, R&D, and Economic Performance – Theory and Evidence on Different Growth Models)

Social capital, in particular levels of interpersonal trust, is known to be associated with different levels of economic performance. More recently, evidence appeared that the increase in economic performance due to higher levels trust is a causal effect. However, the mechanism through which this occurs is still unclear. This paper gauges the effect of trust on economic performance through research and development. I build a baseline model of endogenous growth that allows in its particular cases for different relationships between interpersonal trust, human capital employed in the R&D sector, and economic growth. Then, I test these results by exploiting the exogenous variation in culture caused by differences in past literacy rates and institutions within European countries. Social capital is found to have a positive and sizable causal effect on innovation output (patent applications), but not on human capital in the R&D sector. Given the theories presented, this is interpreted as evidence in favor of lab-equipment models of endogenous growth.