Examining the interrelationship between subjective well-being and social capital

Background Subjective wellbeing (SWB) and social capital (SC) are important economic concepts which may positively affect economic agents and influence economic development. Yet, South Africa ranks low in world rankings when it comes to SWB and SC, ranking at 99 and 80 out of 147 countries in the world, respectively. There is vast literature in developed and homogenous developing countries aiming to study the effects of social capital on SWB and the literature stance is that social capital leads to positive SWB. There is also evidence of SWB leading to positive SC and reverse causality. Few studies attempted to control for reverse causality and deal with the endogeneity problem. The study contributes to existing literature by exploring the effects of SC on SWB in a heterogenous developing country where findings may differ from previous homogenous developed and developing countries and by controlling for reverse causality using an instrumental variable approach. Hence, the study aimed to control for reverse causality by using an instrumental variable approach to investigate the interrelationship between SWB and SC in South Africa – a heterogenous developing country. Methods The study used data from the National Income Dynamic Study (NIDS) a South African panel survey that has the most common determinants of SWB including SC. The study estimates association between SWB and SC using ordered probit models and an instrument variable. Results There is a bi-directional relationship between SC and SWB. Using an IV approach the study found that SC is positive and negatively associated with SWB depending on measure of SC. Conclusions SWB and SC are important facets of economic development; this study may contribute into South Africa’s realisation of its main economic development objectives and increasing its knowledge base of SWB and SC literature. JEL Classification: I31 General Welfare, Well-Being