Abstract

This paper studies whether civic capital (those persistent shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable activities) acts an effective restraint against opportunistic behavior in transactions by looking at the firm-level degree of service outsourcing in Italy. Our results show that firms tend to outsource more services in areas where civic capital is higher. We claim that the rise in the propensity to engage in transactions with outside service suppliers stems from the decrease in opportunism between the parties involved. We consider a dynamic specification which allows to disentangle state dependence of service out- sourcing from firm-level heterogeneity, and we use historical instruments to address the potential endogeneity of civic capital.