Essays on Social Capital and Economic Activity

This thesis comprises three essays on social capital including social distance, social trust and social interaction and explore how they affect the economic activity. Chapter 1 investigates the relationship between social distance and the process of capital accumulation. We show that social distance and the current capital stock are jointly determined and both are critical for economic growth. Economies at a similar stage of economic development, but different in terms of perceived social distance may experience strikingly different long-term prospects. Equally important, however, the likelihood that countries which are similar in terms of perceived social distance may yet experience drastically opposite socio-economic paths if they differ in terms of their economic conditions. In the second chapter, I provide a systematic attempt at the construction of such an alternative measure of trust. Methodologically, I use the Factor Analysis technique in order to assign weightings to all the various characteristics that are generally considered as determinants of generalised trust. These variables are also consistent with a variety of existing empirical evidences and theoretical studies. Consequently, the ranking of countries in trust index is more consistent with people’s perception of trust ranking than the ones in the trust survey. Next, I add to the literature by illustrating with a panel study the effect of trust on FDI inflows as well as income inequality. In the third chapter, I explore the correlation between social interactions and labour market outcomes. I use active group membership, which describes the sum number of groups that individuals currently are active in, as the proxy of social interaction. Various specifications show that a higher level of social interaction is associated with increased probability of labour market participation. Furthermore, I extend to measure the effect of social interaction on wages.