Economic Returns to Social Capital in the Urban Informal Sector in Developing Countries: Micro Evidence from Small Textile Producers in Bolivia

The paper uses micro-level data obtained from surveying informal and formal small textile producers in Bolivia to estimate the economic returns to social capital. Social capital is defined as being linked to other individuals. The paper studies forms of social links that vary with respect to their inclusiveness and their ability to enforce cooperation. The paper shows, first, that social capital has an economic return for informal firms but not for formal ones. Informal firms operate without the shadow of courts in an environment that is characterized by a lack of anonymous trust which makes self-enforcing social links valuable. Second, more inclusive social capital generates a higher return as long as the self-enforcement constraint is met. The evidence supports the hypothesis that the “strength of weak ties”- argument advanced by scholars such as Granovetter, Putnam, and Fukuyama has to be complemented by the game-theoretic condition requiring exchange among linked players to be (self)-enforceable.