Civic Capital and the Vertical Integration of Service Provision: Evidence from Italy.

Abstract

This paper studies whether civic capital acts an effective restraint against opportunistic behavior in transactions, looking at the degree of outsourcing to external suppliers of services in Italian firms. Our results show that, on average, firms tend to outsource more services where civic capital is higher. This effect is particularly strong for firms operating in industries where businesses can easily adjust the level of purchased services to their idiosyncratic needs. To address the issue of endogeneity we also instrument the current stock of civic capital by historical variables. We argue that the rise in the propensity to engage in transactions with outside service suppliers is evidence of a decrease in the opportunistic behavior between the parties involved in the transaction.