Network structure of social capital

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Presentation of an article by Ronald Burt (2000) by Mikhail Dubov of Ruconomics.com

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  • 1. The Network Structure of Social Capital Ronald Burt 2000 A presentation by Mikhail Dubov Ruconomics.com

2. Social capital metaphor

  • Derived from the presumption that social context matters for individual beliefs and behavior.
  • Complement to human capital.
  • Broad agreement:a kind of capital that can create for certain individuals or groups a competitive advantage in pursuing their ends.

3. Network models of markets

  • How do networks affect competition?
  • Information is problematic.
    • Typically circulates within groups before it will circulate between groups.
    • Diffusion of information may take time.
  • Networks affect the markets through providing competitive advantage in information exchange.

4. Social capital of structural holes

  • Structural holesare the weak connections between different groups.
  • Holes create competitive advantage for individuals whose relationships span the holes.
  • Information benefit : Holesare gaps between nonredundant sources of information. Nonredundant contacts offer information that is more additive than overlapping.
  • Control benefit : Better-connected people benefit disproportionately from the holes by having control over third-party relationships.

5. Hole hypothesis

  • Structural holes affect the degree of economic success of the society.
    • Encourage entrepreneurship.
    • Improve the coordination.
    • Reduce costs relative to bureaucratic alternative.
    • Speed the adjustment to equilibrium.
  • Overall, structural holes allow to increase returns to human capital.

6. Empirical evidence

  • Empirical evidence supports the hypothesis.
    • Lab experiments: resources accumulate in people with exclusive connections.
    • Census data: producer profit margins increase with structural holes in network of transactions.
    • Archival and survey data:career advantages of having a contact network rich in structural holes.
  • Holes encourage learning and creativity. Still unclear on entrepreneurship.

7. Closure argument

  • Evidence from Chicago State University:

8. Integration with network closure argument

  • Empirical evidence suggests that dense networks do not affect performance.
    • Consistent with hole hypothesis.
    • Contradiction with Colemans theory that dense networks are the source of social capital ( closure argument ).
  • Rather than rejecting closure altogether we can try to integrate it into the theory.
  • Brokerage is the source of added value but closures help realize this value.

9. Integration: profits

  • Burt( 1992 );Burt et al.( 1999 ) study census data on industry profits.
  • Profit margins decrease with network constraint within the industry (internal constraint is measured as the extent to which output is spread among different producers)
  • Profit margins also decrease with constraint beyond industry (external constraint measured as the extent to which producers have few independent suppliers and customers)

10. Empirical evidence of integration

  • Social capital matters more for managers with fewer peers.

11. Integration: team performance

  • External constraint aggregate network constraint in member networks beyond the team. (brokerage)
  • Internal constraint network constraint of structural wholes within the team. (closure)
  • Managers with a network rich in social capital (low external constraint) are promoted very early, while those with mostly redundant contacts are promoted very late.
  • However, when there is poor communication and coordination within a team, the team can be expected to perform poorly .

12. Conclusions

  • The closure argumentdescribes how dense or hierarchical networks lower the risk associated with transaction and trust, which is associated with performance.
  • The hole argumentdescribes how brokerage creates opportunities to add value, which determined performance.
  • The evidence (by Burt) justifies expanding the whole argument to include closure as an aspect of social capital enabling a group to act to benefit from the structural holes to which group members have access.
  • Otherwise the evidence entirely supports holes over closure.