Surfing alone? The internet and social capital

Does the Internet undermine social capital, such as real-world inter-personal relations and civic engagement? Merging unique telecommunication data with geo-coded German individual-level data, we investigate how broadband Internet affects social capital. A first identification strategy uses first-differencing to account for unobserved time-invariant individual heterogeneity. A second identification strategy exploits a quasi-experiment in East Germany created by a mistaken technology choice of the state-owned telecommunication provider in the 1990s that hindered broadband Internet roll-out for many households. We find no evidence of negative effects of the Internet on several aspects of social capital. In fact, the effect on a composite social capital index is significantly positive.

That is from a new published paper by Stefan Bauernschuster, Oliver Falck, & Ludger Woessmann. A draft is here. 
They explain in the conclusions

Our findings are in clear contrast to the significant negative impact of TV consumption on social capital shown by Olken (2009). It seems that on average, because of the distinguishing feature of interactivity, the Internet is qualitatively different from the television in that its main function is not so much one of passive entertainment. At least in some areas of social engagement, the main function of the Internet seems rather one of active information and communication – which the Internet provides in an individualized form at any time – that is conducive to social interaction. Such an interpretation is in line with the fact that the significant positive effects are found in particular for activities where reserving and purchasing tickets might be easier via the Internet, as well as with suggestive evidence that most people use the Internet for information search and communication, whereas much fewer people use it for mere entertainment purposes. p. 23

Every cloud has a silver lining

In this article we investigate the relationship between disasters and societal trust. A growing body research suggests that factors such as income inequality, ethnic fractionalization and religious heritage are important determinants of social capital in general and trust in particular. We present new panel data evidence of another important determinant of trust – the frequency of natural disasters. Frequent naturally occurring events such as storms require (and provide opportunity for) societies to work closely together to meet their challenges. While natural disasters can have devastating human and economic impacts, a potential spillover benefit of greater disaster exposure may be a more tightly knit society.

The title of the the paper is "Do Natural Disasters Enhance Societal Trust?" A draft is here. 

Bowling for fascism: social capital and the rise of the Nazi Party

Social capital is often associated with desirable political and economic outcomes. This paper contributes to a growing literature on its "dark side". We examine the role of social capital in the downfall of democracy in interwar Germany. We analyze Nazi Party entry in a cross-section of cities, and show that dense networks of civic associations such as bowling clubs, choirs, and animal breeders went hand-in-hand with a rapid rise of the Nazi Party. Towns with one standard deviation higher association density saw at least one-third faster entry. All types of associations – veteran associations and non-military clubs, “bridging” and “bonding” associations – positively predict NS Party entry. Party membership, in turn, predicts electoral success. These results suggest that social capital aided the rise of the Nazi movement that ultimately destroyed Germany’s first democracy. We also show that the effects of social capital were more important in the starting phase of the Nazi movement, and in towns less sympathetic to its message.

That is the abstract of this paper by Shanker Satyanath, Nico Voigtländer, & Hans-Joachim Both.
From the conclusions:

Why is social capital associated with benign outcomes in some contexts, but not in others? We examine political differences within Germany to answer this question. Weimar Germany’s institutions did not work well – governments were weak and short-lived, economic policy often failed, and extremist parties blossomed (Bracher 1978). At the same time, the state of Prussia was a bastion of well-functioning republican institutions. There, the “Weimar coalition” reigned without interruption from 1919 to 1932. Politicians from the middle governed, and their defense of democracy was vigorous (Orlow 1986). In Prussia, the link between association density and Nazi Party entry was much weaker than in the rest of the country. This suggests that the effects of social capital depend on the institutional context; where democratic politics on the whole “worked”, more social capital was not associated with more Nazi Party entry. (p. 29) 

HT: Fabio Sabatini

Guatemala Paper of the Day (Violence in a Random Sample of Households)

From a paper (the third one in the list) by Dinesen et al., two interesting things, (1) the positive relationship between prevalence of violence and household income, and (2) more violence in households in urban areas. 

I grew up in San Marcos, where the level of violence is lower (Figure 1). 

An except from the methods

Data from a cross-sectional victimization survey conducted in 2008–2010 in Guatemala were analyzed. Two-stage proportionate sampling was used in the survey. Households (n = 1 300) were randomly sampled within a random sample of communities (n = 118) in five administrative departments. The survey collected information on the six-month vio- lence exposure of 6 335 individuals.

Self-government and Long Term Persistence of Institutions (Italy)

From a paper by Luigi Guiso, Paola Sapienza, & Luigi Zingales. 

We show that cities that experienced self-government in the Middle Ages have more civic capital today [from the abstract]. 

Our reading of medieval history (among others, Reynolds, 1997; Milani, 2005; Jones, 1997; Tabacco, 1987; Pirenne, 1956) suggests that bishops played a key role in coordinating local citizens in their struggle against the Emperor for independence. Therefore, we use the presence of a bishop before the year 1000 as one predictor of eventual free city-state status [p. 4]. 

Another natural factor is strategic military position. Cities on hilltops or surrounded by waters were easier to defend militarily and hence more likely to succeed in rebelling against the Emperor and becoming independent. As a proxy for strategic position we use foundation by the Etruscans. The Etruscans (ninth century BCE), who populated an area stretching from Mantua in the North to Salerno in the South, were the first Italian civilization to be organized in the form of city-states. Since they had “first mover” advantage, they tended to locate their cities in positions that were easy to defend, so that Etruscan origin is a good proxy for strategic location, as the picture of their capital Orvieto (Figure 1 in the Appendix) suggests [p. 4].

HT: Fabio Sabatini

Social Entrepreneurship: Drivers and Positive Effects

We model and test the relationship between social and commercial entrepreneurship drawing on social capital theory. We propose that the country prevalence rate of social entrepreneurship is an indicator of constructible nation-level social capital and enhances the likelihood of individual commercial entry. We further posit that both social and commercial entrepreneurial entry is facilitated by certain formal institutions, namely strong property rights and (low) government activism, albeit the latter impacts each of these types of entrepreneurship differently. We apply bivariate discrete choice multi-level modelling to population-representative samples in 47 countries and find support for these hypotheses.

That is from the paper "Entrepreneurship, Social Capital, and Institutions" by Estrin, Mickiewicz, & Stephan (Entrepreneurship Theory and Practice, May 2013).

In terms of SE education the authors add:

For entrepreneurship education, our research suggests that enhancing social entrepreneurship could be an important route to increase entrepreneurship among university graduates and women – both topics high on the policy agenda. Thus, universities offering courses and business incubators for commercial entrepreneurs should re-think to widen their offering to also encompass social entrepreneurship; this is already beginning, but there is need for more. Importantly, social entrepreneurship is in many ways more complex than commercial since it requires combining business models with an understanding of social change. Hence it requires different (societal) value creation logic, and specialist staff to train for these skills.

One of the main arguments is that SE creates social capital. 

Natural disasters and social capital (Japan)

The Great Hanshin-Awaji (Kobe) earthquake hit Japan in 1995, causing devastating damage to the economic landscape of southern-central Japan. However, the earthquake also caused people to realize the importance of social capital in Japan. Based on a large, individual-level database comprising 488,223 observations, this study investigates how and the extent to which the earthquake enhanced the investment in social capital through participation in community activity. The differences-in-differences method was used, and the following key findings were obtained: (1) In Japan, people were more likely to invest in social capital in 1996 than in 1991, (2) the effects of the earthquake decreased as the distance of one’s place of residence increased from Kobe, and (3) he earthquake significantly increased the social capital investment rate of Kobe residents, whereas it had no significant influence on the investment rate of residents of large cities close to Kobe. Source: Eiji Yamamura (February 2013). There is a large literature on that topic. See here.

Trust and Development: Full Circle?

I recently posted abstracts of two articles on trust: One reports that trust affects economic development via 1) institutions and the rule of law, and 2) education. According to  another one trust explains almost half of the variation of entrepreneurship activity in a sample of countries [a friend said this is a full circle for a theory of economic development]. 

In the latest number of the QJE, Bloom, Sadun and Van Reenen have a new article titled "The Organization of Firms Across Countries" (a draft is here), and they say:

We argue that social capital as proxied by regional trust and the Rule of Law can improve aggregate productivity through facilitating greater firm decentralization. We collect original data on the decentralization of investment, hiring, production and sales decisions from Corporate Head Quarters to local plant managers in almost 4,000 firms in the US, Europe and Asia. We find Anglo-Saxon and Northern European firms are much more decentralized than those from Southern Europe and Asia. Trust and the Rule of Law appear to facilitate delegation by improving co-operation, even when we examine "bilateral trust" between the country of origin and location for affiliates of multinational firms. We show that areas with higher trust and stronger rule of law specialize in industries that rely on decentralization and allow more efficient firms to grow in scale. Furthermore, even for firms of a given size and industry, trust and rule of law are associated with more decentralization which fosters higher returns from information technology (we find IT is complementary with decentralization). Finally, we find that non-hierarchical religions and product market competition are also associated with more decentralization. Together these cultural, legal and economic factors account for four fifths of the cross-country variation in the decentralization of power within firms.

It seems then that trust is extremely important for economic development (and this is very old news). The questions are: Where does trust come from? And how individuals in a society can increase trust levels? Could we import or export trust? 

In the book Making Democracy Work (1994) Robert Putnam argues that northern Italy is more developed than the south because it had associations and clubs that created trust and social capital. And he indicates that the associations, clubs, etc., came from guilds that existed during the dark ages, and we don't know much beyond that . . . 

Interestingly it seems that trust comes from peace. Societies should look for peace first and trust will follow. Not surprisingly Adam Smith was right regarding the requirements for prosperity: rule of law, low taxes, and peace. He did not talk about trust but probably understood that peace is a prerequisite for it. 

Social Participation and Cognition Later in Life

In this paper we investigated the impact of social activities on cognition later in life (as measured by test scores for numeracy, fluency, and immediate and delayed recall), by using representative and harmonized survey data for individuals aged fifty and above from eleven European countries. 

We found that social activities have an important effect on cognition, with results differing by sex. Social activities increase cognitive performance in females by affecting their fluency, and immediate and delayed recall. On the other hand, the improvement in males comes with respect to numeracy and delayed recall. Importantly, we found these effects after addressing the issue of the endogeneity of social activities through the use of panel data and IV methods. As a result, we conclude that social activities have a positive causal impact on cognition in older age. 

Given that several studies have demonstrated that higher cognition in older age is associated with significantly better economic outcomes, our findings suggest that having a socially active life in older age can have an important economic impact. Therefore, pursuing policies that target the social involvement of older people can be justified not only on medical but also on economic grounds.

[What kind of social activities?] The authors explain:

. . . [V]olunteering, participation in a political organization or a social club, and attendance of an educational course. 

Source: "The Impact of Social Activities on Cognitive Ageing: Evidence from Eleven European Countries," (Christelis and Dobrescu, September 2012).
[I hope e-social-networks count as social activities].

Cash transfers, social capital, and crime

Cash transfer programs can provide important financial support for poor households in developing countries and are becoming increasingly common. However the potential for mistargeting of program funds is high. This paper focuses on the social consequences arising from misallocation of resources in close knit communities. We find that the mistargeting of a cash transfer program in Indonesia is significantly associated with increases in crime and declines in social capital within communities. Hence poorly administered transfer programs have a potentially large negative downside that extends beyond the pure financial costs that have been the focus of the literature to date.

That is from a new paper by Cameron and Shah (July 2012).  

Cooperatives - somer recent literature

Cooperatives look to promote economic development. They are based on the assumption that a group of people working together can produce more than the addition of the production of each individual working separately - cooperatives can generate economies of scale: 2 + 2 = 5. The basic economic challenge that cooperatives face is a collective action problem, which depends on the generation and existence of institutions (rules) that allow to solve the free riding problem (see here.). Elinor Ostrom's work deals precisely with the ways in which individuals try to solve collective action problems (see here). 


The research on cooperatives consists mainly of case studies, which are context dependent. Cooperatives work well in some countries or regions but not so well in others. I have not seen a cross country study of cooperatives. There are some recent trends in the literature, however: 

1) Cooperatives are more prevalent in regions of high unemployment (see here).

2) Cooperatives are an important source of innovation (see here), sometimes even when compared with private enterprises (see here). 

3) Cooperatives can increase the bargaining power of producers (see here).
4) Ethnic and religious identity usually contributes to long term survival of cooperatives (see here). 

Building Trust

Great paper by Richard M. Locke (to download it click "cached" in the link provided):

This paper [argues] that trust can be created, even in contexts void of the supposed prerequisites and /or preconditions underlying it. It has sought to illustrate this argument through two case vignettes of collective action among producers in Southern Italy and Northeast Brazil. Although both cases presented in this paper centered on the food/agricultural industry, my other research includes similar cases of cooperation among producers in the shoe, garment, jewelry and machine tool industries. In short, the outcomes observed are in no may particular to or derivative of the two sectors described above.

What all these cases share is the process through which trust was built among them. Although the initial challenges facing fruit exporters in Petrolina-Juazeiro and mozzarella manufacturers in Campania were different, the underlying thrust of their problems was the same: failure to cooperate would undermine the competitiveness, perhaps even the viability of the local industry. As a result, the producers came together in defense of their own self-interest. And in both cases, the initiative was taken by a small group of large producers, precisely those who had most to lose should the situation not be corrected. In Caserta, four large producers involved in both buffalo herding (milk production) and cheese manufacturer came together to found the Consorzio in order to defend themselves from the dual threat of large, outside firms entering the local industry and of local firms adulterating the product. In Petrolina-Juazeiro, again four of the largest growers came together to establish Valexport in order to avoid past mistakes that led to the decimation of the local melon industry.

Yet, in both cases, these producers’ associations quickly became more encompassing and hence representative organizations. As a result of government pressure, both the Consorzio and Valexport opened its doors to all local producers involved in the same sectors. As a result, both associations soon aggregated a diverse mix of members, of different sizes and at times with different interests. Essentially government agencies entered into an exchange with these producers’ associations. In return for the provision of a public or quasi-public good -- the granting of the DOC in the case of the buffalo mozzarella cheese producers in Southern Italy, and extensive financial and technical support in the fruit-fly eradication program in the case of Petrolina-Juazeiro -- the government insisted that these associations open their doors and become truly representative bodies. In many ways, this makes sense since given that democratic governments are not supposed to support a few select societal actors but rather all of their citizens. However, there are numerous examples of precisely this kind of selective support for industry actors by governments throughout the world (see Evans 1995). Thus, I am not arguing that government everywhere and always acts in ways that encourages associations to become more representative and encompassing, only that public policy can play a positive role in building trust by precisely engaging in these types of exchange.

Finally, both cases illustrated the importance of self-governance mechanisms in supporting and maintaining the cooperative efforts of the local producers. Careful monitoring efforts by Valexport was essential to the success of the fruit-fly eradication program. Without these efforts as well as the association’s provision of collective services to all members, pest control in the PJ region would not have been possible. Periodic testing and sanctioning of members were also essential to the ability of the Consorzio to reduce the adulterating practices among its members. Had these practices continued, the distinctiveness and hence source of competitiveness of the entire industry would have surely eroded. In short, all three elements – self-interest, government policy, and self-governance institutions were essential to the construction of trust among producers in Campania and Petrolina-Juazeiro.

If trust can be built in the Italian Mezzogiorno and the Brazilian Northeast, two regions often portrayed as deserts of trust, lacking most if not all of the supposed sociological and institutional preconditions underlying this resource, then surely, there is hope for other actors in other regions of the world. My hope is that this paper will help us look beyond our own preconceived notions of the very limited circumstances under which trust can exist and begin to imagine how trust-like behavior can be promoted in a wide array of socio-economic and political circumstances.

This paper changes the notion of lack of social capital in Northern Brazil, but specially in Souther Italy. Cooperation can emerge and this paper shows how. The paper should be discussed in economic development (or institutional economics) classes after discussing books like  The Moral Basis of a Backward Society or/and Making Democracy Work. By the way, the list of references in the paper by itself is a comprehensive reading list for a class on economic development or institutional economics. 


Update: a review by John Wilkinson.

Econ. Dev. Article of the day: Household Income and Social Capital in Rural Tanzania

From the article: Narayan and Pritchett (1997) Cents and Sociability: Household Income and Social Capital in Rural Tanzania, World Bank, Washington DC, USA.

Mian points:

“[s]ocial capital” is indeed both capital, in that it raises incomes, and social, in that household outcomes depend on village not just household social capital.

From an economist’s viewpoint . . . pure non-cooperative action would lead to inferior outcomes and hence that greater social capital potentially leads to better outcomes by facilitating greater cooperation.

Five mechanisms of how social capital affect outcomes:

First, Putnam’s (1993) fascinating analysis of the variations in public sector efficacy of the newly created regional governments in Italy suggests that regions of Italy in which people had greater degrees of horizontal connections had more efficacious governments.

Second, independent of the efficacy of governmental activity the role of group or community cooperative action in solving problems with a local “common property” elements is potentially important.

Third, diffusion of innovations might be facilitated by greater linkages among individuals.

Fourth, greater associational activity may lead to less imperfect information and hence lower transactions costs and a greater range of market transactions in outputs, credit, land and labor leading to higher incomes.

Fifth, greater sharing of household risk and informal insurance may allow households to pursue higher return but more risky activities and production techniques.

[h]igher social capital was associated with higher levels of school quality.

[v]illages with higher social capital alarger fraction of households report using credit for agricultural improvements.

[s]ocial capital appears to shift (natural log) expenditures upward without affecting the inequality of the distribution.

[a] one standard deviation increase in the village social capital index (as would be caused by half the village joining one additional group with average characteristics) is associated with at least 20 percent higher expenditures per person in each household in the village.

The social capital of a household’s village is as important in determining the household’s income as many of the household’s own characteristics which receive a great deal of attention (e.g. schooling, assets or distance to markets, gender of household head).