Effect of Social Capital on Raising Productivity of Urban Centers - Measurement that takes the benefits of agglomeration into consideration

Author Name HATTA Tatsuo  (Faculty Fellow, RIETI) /KATO Hidetada  (International Christian University)
Creation Date/NO. March 2007 07-J-011
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In this paper we analyze the effect of the increase in productivity of office operations in urban centers brought about by the enhancement of social capital. This analysis shows that after considering the benefits of agglomeration, the marginal increase in productivity caused by social capital is substantial in major cities but it turns out to be negligible in smaller cities.

The growth of urban centers increases the productivity of office operations through two external effects. The first externality is the direct benefit of agglomeration for the offices in a region. If a large number of companies concentrate their premises in one area and their face-to-face contacts become easier, communication and transaction costs between companies are reduced, and the productivity of offices increases. This is called external economics of scale.

The second externality is generated by the increase of social capital that accompanies urban growth. For example, the development of high-speed communications facilities such as the Internet makes high-speed information transmission possible, and greatly reduces corporate costs for exchanging information.

Numerous research projects have been conducted to measure the effect of social capital on increasing productivity, namely the effect of the second category. Most of those analyses show that the marginal increase in productivity caused by social capital is big in major metropolitan areas. However, these research projects do not take into consideration the first category effect of growth, namely the benefit of agglomeration, and assume that the production function is linear homogeneous with respect to input factors, when the level of social capital is kept constant. Because of this, what this prior research has referred to as being the impact of social capital on increasing productivity may be no more than measurements of external economies of scale. In this paper, through the use of microdata we separate and measure these external effects, and by doing this we extract the impact of social capital on increasing productivity and analyze its marginal productivity.