Paper published in the Journal of Law, Economics and Organization, volume 29, issue 1, 2013. First published online in 2011.
Abstract Social capital appears to have significant consequences for economic development, yet we know little about how social capital develops or the role of government institutions in promoting or hindering that development. The two key approaches to social capital, as civic engagement or as generalized trust, are. combined in a single model focusing on the role of contract enforcement in their development. Contract enforcement is shown to have nonmonotonic effects on civic engagement, generating nonmonotonic effects on the evolution of generalized trust. In particular, moderate levels of contracting institutions may crowd-in civic engagement and trust, whereas high levels of contracting institutions have the opposite effect. Furthermore, the model generates a low-trust trap in which contracting institutions are ineffective at promoting civic engagement or trust.