Social capital is a topical concept in economic development. The claim is that regional differences in economic success can be explained in terms of differences in various social variables, called social capital. This paper attempts to delineate the mechanisms that link social capital and economic development. I show that social capital can produce two kinds of trust, both of which can reduce transaction costs. It is important to keep these two sources of trust apart, since development policies utilizing social capital have different impacts, depending on the basis of trust.
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