The Relationship between Social Capital and the Economic Well-being of Households (by the Evidence of Transition Economies)

Numerous researchers argue that institutional effectiveness is essential to enhance the economic well-being. The current unfavorable economic situation highlights the following research questions: which resources do households use to maintain and increase their well-being in those transition economy countries where institutions demonstrate low effectiveness? Our research focuses on social factors. Particularly, we examine the relationship between social capital and the economic well-being of households in the transition economy countries. In compliance with the following statement by M. Granovetter.: “institutional arrangements … do not produce trust but instead are a functional substitute for it”, we hypothesize that the peculiar “substitution effect” takes place. In other words, effective performance of formal institutions reduces the need for using social capital to maintain material prosperity, while weak institutions, vice versa, lead to the accumulation of social capital resources. Social capital as an informal institution reduces transaction costs by promoting collective action. We test our hypotheses on the data from the Life in Transition Survey (2nd round) using hierarchical regression modeling. Our research gives evidence of a substitution effect: formal institutions (higher quality of government, more generous welfare policy) reduce the effect of social capital on economic well-being. Our results also indicate that formal institutions and social capital mutually strengthen each other in their effect on subjective well-being. Additional robustness checks confirm our conclusions.