Social Capital in Economics

Until twenty years ago the terms "social capital" and "local development" did not exist in economic literature. In the last two decades, however, both issues have become important not only in the academic world, but also in public policy programmes and debates. This new interest has been largely stimulated by the growing awareness that the standard theory of perfect competition under complete contracts is insufficient to accomodate a number of important economic phenomena. In particular, the observation and the analysis of the limitations agents face in contracting has focused attention on the importance of the role played both by social relations in economic transactions, and by institutions and the characteristics of the context in which such transactions are embedded. This chapter aims to trace the essential link between institutions, social capital and local development from the perspective of economics. Our objective is not, however, to supply a review of the various theories on these questions, but rather to identify a common framework to assist analysis of the results obtained in these fields.