The Network Structure of Social

CapitalRonald Burt

2000

A presentation by Mikhail Dubov

Ruconomics.com

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 .

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.

Social capital of structural holes

Structural holes are the weak connections between different groups.

Holes create competitive advantage for individuals whose relationships span the holes.

Information benefit: Holes are 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.

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.

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.

Closure argument

Evidence from Chicago State University:

Integration with network closure argument

Empirical evidence suggests that dense networks do not affect performance. Consistent with hole hypothesis. Contradiction with Coleman’s 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.

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)

Empirical evidence of integration

Social capital matters more for managers with fewer peers.

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.

Conclusions

The closure argument describes how dense or hierarchical networks lower the risk associated with transaction and trust, which is associated with performance.

The hole argument describes 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.