Social capital and the status externality

Abstract

AbstractThis paper investigates how the presence of social capital affects the externality arising from status‐seeking preference as a parable for inefficient antagonistic behavior. It is assumed that the stock of social capital accumulates through the strategic interaction among a finite number of rational, infinitely‐lived individuals. Using a differential game, we show that there are two types of Markov perfect equilibrium strategy, of which one leads a society to zero social capital, while the other leads to the satiation level of social capital. When there is an unstable interior steady state, there is a threshold: with any initial stock of social capital above (below) that, society is able to build social capital (get stuck in a poverty trap of null social capital). In the latter case, the intervention of governments is called upon, because social welfare in the poverty trap is less than that in the social capital‐rich society.