The role of social capital in enhancing factor productivity: Does its erosion depress per capita GDP?

We aim at reconciling Putnam's claim that social capital has declined in the U.S. in the last decades with the satisfactory growth performance of the U.S. economy over the same period. This puzzle originates from the fact that – according to most literature – social capital enhances factor productivity (mainly by reducing defiant and opportunistic behavior). We model the hypotheses that the expansion of market activities weakens social capital formation, and that society reacts to the decline in social capital by spending more to protect property and enforce contracts. We show that this process may lead to a higher GDP level.