Why is Social Capital a “Capital”? Public goods, Co-operative Efforts and the Accumulation of Intangible Assets

Given the idea of this PRISM research team of the University of Ferrara that social capital is a key intangible asset that should be more explicitly considered for policy to become more effective, this chapter aims at providing more insights precisely on this intangible asset. We argue that social capital (SC) is a productive asset just as is physical capital, an approach which underscores that an increase in trust-based relations on average reduces transaction costs, just as an increase in physical capital ought to reduce average production costs. In turn this means that several characteristics normally associated with physical capital are also shared by SC. In both cases, a productive asset is created by foregoing a current benefit in return for a probable future benefit. We can therefore analyse SC with the same approach we normally use for physical assets. SC is however essentially a public good, in that it resides in the willingness of individual decision makers to engage co-operatively with each other. This is the aspect of SC that establishes it firmly as a form of collective intangible, and in this context we adopt a mixed-public good framework, since income streams deriving from SC are not totally appropriable for private use, and we likewise suggest that SC be considered the public component of mixed-public capital. As an example, consider a network of firms investing in R&D and creating voluntary agreements aimed at achieving environmental targets for reduced pollution, increased recycling, etc. In this case voluntary agreements are the public component of the mixed-public R&D. This chapter aims to identify and analyse the conditions under which incentives exist for a dynamic increase of SC, taking into account that the public component of a mixed-public good creates certain distortions in private decisions leading to SC accumulation. These decisions, and their distortions, arise from the nature of benefits yielded to firms, the structure of internal and external costs and the individual firms’ expectations.