Social capital is commonly studied from the perspective of sociology or political science. This chapter investigates the concept from a microeconomic perspective. I suggest that from an economic perspective, social capital is “social” because it generates externalities arising from social interaction. It is “capital” only if its effects persist.

The model of social capital that I construct has three building blocks: social interaction, the effects of social interaction, and the mechanisms by which social interaction works. Each of these building blocks is sub-divided based on four types of social interaction: simple one-way relations between an agent and others, networks, clubs, and hierarchical organizations. I distinguish three types of effects, all involving externalities: those relating to knowledge, those relating to opportunistic behavior, and those relating to free-riding. I identify two mechanisms by which social interaction achieves each of these effects. The resulting schema is not the only way of conceptualizing social capital. However, greater simplicity would be achieved at the price of leaving out some aspect of social interaction on which there is empirical evidence of an economic effect. Greater complexity is always possible but would obviously have a price in terms of accessibility.

I begin by defining and classifying types of social capital and then analyzing how social interaction raises output. After extending the analysis by allowing the amount of social interaction to be endogenous, I disaggregate the social capital generated by civil society and that created by government.