The rationality of social structure: Cooperation in social dilemmas through investments in and returns on social capital

• We provide a formal model of investments in and returns on information exchange networks.
• Information exchange networks constitute social capital. They foster cooperation in social dilemmas.
• The model covers a class of social dilemma games.
• We analyze network formation under the assumption of full strategic rationality.

We develop a game-theoretic model of how social structure in the sense of a network of relations between actors helps to mitigate social dilemmas. We simultaneously endogenize the network by modeling actors’ incentives to establish the network. Since the network of relations helps to mitigate social dilemmas, it constitutes social capital. We thus analyze investments in and returns on social capital in social dilemmas and characterize the value of social capital. Our model covers a class of social dilemma games including the Trust Game, the Investment Game, the Prisoner's Dilemma, the two-actor Public Goods Game, and others.