Structural Change and Economic Dynamics 23 (2012) 127–136 Contents lists available at SciVerse ScienceDirect Structural Change and Economic Dynamics jou rnal h omepa g e: www.elsevier.com/locate/sced When sociable workers pay off: Can firms internalize social capital externalities?  Alexandra Ferreira-Lopes a,b , Catarina Roseta-Palma a,∗ , Tiago Neves Sequeira b,c a Instituto Universitário de Lisboa (ISCTE – IUL), ISCTE Business School Economics Department, Avenida das Forc ¸ as Armadas, 1649-026, Lisboa, Portugal b CEFAGE – UBI Research Unit, Univ. Beira Interior (UBI), Portugal c Univ. Beira Interior (UBI), Management and Economics Department, Portugal a r t i c l e i n f o Article history: Received December 2010 Received in revised form January 2012 Accepted January 2012 Available online 3 February 2012 JEL classification: M14 O15 O41 Z13 Keywords: Corporate social responsibility Social capital Human capital Economic growth a b s t r a c t We use an endogenous growth model to contrast the socially optimal allocation of human capital with the decentralized solution, in a context where workers make the choices that determine social capital accumulation. As social capital is expected to increase productivity but is not traded in markets, a positive social capital externality is identified. We discuss the possibility that, in response to this externality, firms subsidize social capital accumulation activities, incurring into additional costs that are recouped through productivity gains. This reaction by firms may be seen as a justification for some corporate social responsibility actions targeted at workers, although a full internalization of the externality does not look achievable in practice. © 2012 Elsevier B.V. All rights reserved. 1. Introduction Worker productivity is crucial for economic growth. Traditional economic models consider the role of physical capital and labour in production, whereas the importance of human capital accumulation, in a wider sense, has been  The authors thank two anonymous referees, participants at the GIRA Conference, participants at the ASSET Annual Meeting, the 5th Annual Meeting of the Portuguese Economic Journal, and also Sandro Mendonc ¸ a for helpful comments. The authors also acknowledge support from FCT – Fundac ¸ ão para a Ciência e a Tecnologia (Science and Technology Foun- dation), project PTDC/EGE-ECO/102238/2008. Alexandra Ferreira-Lopes and Catarina Roseta-Palma also acknowledge financial support from PEst- OE/EGE/UI0315/2011. The usual disclaimer applies. ∗ Corresponding author. E-mail addresses: alexandra.ferreira.lopes@iscte.pt (A. Ferreira-Lopes), catarina.roseta@iscte.pt (C. Roseta-Palma), sequeira@ubi.pt (T.N. Sequeira). the focus of endogenous growth theory. Social capital is a fairly recent addition to growth models, where it can represent the impact of trust and social networks on pro- ductivity and hence on growth. Since there is no specific market for social capital, its decentralized accumulation will generally not be optimal, which means that a social capital externality exists. In fact, in a static world without capital accumulation, the firm could adjust wages so as to induce workers to choose their time allocation optimally. Thus, the social capital externality is essentially a dynamic phenomenon, in which firms and households benefit from an intangible investment for which a market does not exist. Roseta-Palma et al. (2010) develop an endogenous growth model with natural and social capital where the interaction between these types of capital is studied. In this paper, on the other hand, we investigate whether the social capital externality can act as an incentive for firms to increase their corporate social responsibility 0954-349X/$ – see front matter © 2012 Elsevier B.V. All rights reserved. doi:10.1016/j.strueco.2012.01.004