Does Social Capital Have an Economie Payoff? A Cross-Country Investigation Stephen Knack; Philip Keefer The Quarterly Journal of Economics, Vol. 112, No.4, (Nov., 1997), pp. 1251-1288. Stable URL: bhtp:flinks jstor-org/sici?sici~0033-5533%28 1997 119291 12%3A4%3C1251%3 ADSCHAB%3E2.0.CO%3B2-Y ‘The Quarterly Journal of Economics is currently published by The MIT Press. ‘Your use of the ISTOR archive indicates your acceptance of ISTOR’s Terms and Conditions of Use, available at htp:sseww jstor org/aboutiterms.html. ISTOR’s Terms and Conditions of Use provides, in part, that unless you hhave obtained prior permission, you may aot download an entie issue of a journal or multiple copies of articles, and ‘you may use content in the ISTOR archive only for your personal, non-commercial use Please contact the publisher eegarding aay futher use ofthis work, Publisher contact information ray he abained at itp jor onaiournalsmitaesshe. Each copy of any part ofa JSTOR transenission must contain the same copyright tice that appears on the screen or printed page of such transtnission, ISTOR isan independent not-for-profit organization dedicated to creating and preserving a digital archive ot scholarly journals. For more information regarding ISTOR, please contact suppom@jstor org. up:thrww stor. orgy ‘Thu Sep 21 04:18:24 2006DOES SOCIAL CAPITAL HAVE AN ECONOMIC PAYOFF? ACROSS-COUNTRY INVESTIGATION” ‘Stepney Kuack ANp Panip Keerer ‘This paper presents evidence that “socal capital” matters (or measurable eo nomic perfarmance, using indicators af trust and evic narms from the World Vale uuce Survays for a sample of 29 market economies. Membershipa in formal ‘roups—Putnam’s measure of soeiel eapital—is ot assoelated with trust or wit Improved ceanome performance. We find trust and civie norms are stronger in nations with higher and mare equal incames, with institutions that restrain predatory actions of chief executives, and with hetter-eduested and ethnically ho I. Ivrropucrion ‘The notion of social capital has attracted great academic and journalistic attention, particularly with the publication of Put- nam's Making Democracy Work [1993], in which the concept is used to explain differences in the economic and government per- formance of northern and southern Italy. We explore in this paper the following issues related to social capital and economic performance: i). the relationship between interpersonal trust, norms of civie cooperation, and economic performance, and some ‘of the policy and other links through which these dimen- sions of social capita] may have economic effects; ii} the conflicting hypotheses of Putnam [1993] and Olson (19821, on the relationship between associational activity and growth; and iii) the determinants of trust and norms of civie cooperation, including levels of associational activity and formal institutions. ‘Trust, cooperative norms, and associations within groups each fall within the elastic definitions that most scholars have “uti ements wre pel by Oar Manag, Caper cg tess et uy at ee ‘mont Conference on the Political Economy of Growth, Research ostistanee a5 ‘Bsc! Shaan mR fe aa cea: 8 IEAM Rca "tect Caan he Fle and Sica Haseena utc of he aati Toor en leap gy otiecues St ce at ps uated Congue neal neha vate oe i Clr nec Mean, Sir a grant U8 gna fr nconanonnl Bevelopmests 11907 by the President and ellos of Harvard College and dhe Maseacattis Insti ‘of Teco. The Quarters Journal ef Ezouamics,Nosarbae 1957,1252 (QUARTERLY JOURNAL OF ECONOMICS applied to the term social capital, Coleman [1990, pp. 300-801) writes that “authority relations, relations of trust, and eonsen- sual allocations of rights which establish norms” can bo viewed as resources for individuals, noting that: Loury [1977] introduced the term “social capital” to describe these resources. Following Granovetter (1973], Putnam points to the potential importance of weak ties across kinship groups. Both Goleman and Putnam refer to trust and norms of civie-minded behavior as other manifesta- tions of social eapit Our analysis arrives at three major conclusions. First, trust and civic caoperation are associated with stronger economic per- formance, Second, associational activity is not correlated with economic performance—contrary to Putnam's [1993] findings across Italian regions. Third, we find that trust and norms of civic cooperation are stronger in countries with formal institutions that effectively protect property and contract rights, and in coun- tries that are less polarized along lines of class or ethnicity. II, How Cay Trust Arrncr Beonomic PeRroRMANCE? Economie activities that require some agents to rely on the future actions of athers are accomplished at lower cost in higher- trust environments. According to Arrow (1972, p. 357), “Virtually every commercial transaction has within itself an element of trust, certainly any transaction conducted aver a period of time, It can be plausibly argued that much of the economie backward- ness in the world can be explained by the lack of mutual confi- dence.” Trust-sensitive transactions include those in which goods and services are provided in exchange for future payment, em- ployment contracts in which managers rely on employees to ac- complish tasks that are difficult to monitor, and investments, and savings decisions that rely on assurances by governments or banks that they will not expropriate these assets, Individuals in higher-trust cocieties spend less to protect themselves from being exploited in economic transactions. Written contracts are less likely to be needed, and they do not have to specify every possible contingency. Litigation may he less frequent. Individuals in high- trust societies are also likely to divert fewer resources to pro- tecting themselves—through tax payments, bribes, or private services and equipment—from unlawful (criminal) violations of their property rights. Low trust can also discourage innovation, If entrepreneurs must devote more time to monitor-