This paper examines social capital and its relation with economic development. We focus on the role that interpersonal relationships play in social exchange, whether through the market or through the provision of public goods. By facilitating search and trust, social capital can increase the efficiency of social exchange where formal institutions are weak. But the benefits from social capital are likely to be unequally distributed. Given these features, documenting empirically the benefits of social capital is complicated by the presence of negative and positive externalities and by the existence of leadership and group effects. Lessons for development policy are drawn at the end.
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