Social network capital, economic mobility and poverty traps

Abstract

This paper explores the role social network capital might play in facilitating poor agents' escape from poverty traps. We model and simulate endogenous link formation among households heterogeneously endowed with both traditional and social network capital who make investment and technology choices over time in the absence of financial markets and faced with multiple production technologies featuring different fixed costs and returns. We show that social network capital can either complement or substitute for productive assets in facilitating some poor households' escape from poverty. However, the voluntary nature of costly link formation also creates exclusionary mechanisms that impede some poor households' use of social network capital. Through numerical simulation, we show that the ameliorative potential of social networks therefore depends fundamentally on the broader socio-economic wealth distribution in the economy, which determines the feasibility of social interactions and the net intertemporal benefits resulting from endogenous network formation. In some settings, targeted public transfers to the poor can crowd-in private resources by inducing new social links that the poor can exploit to escape from poverty.