When sociable workers pay off: Can firms internalize social capital externalities?

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.

► We provide an endogenous growth model with a positive externality arising from social capital.
► We show that the social capital externality gives rise to distortions in human capital allocations.
► The decentralized level of social capital relative to human capital is, as expected, too low.
► Firms can improve the allocation of human capital through CSR activities that facilitate social capital accumulation by workers.
► This is the first attempt to consider CSR as a response to social capital externalities in endogenous growth theory.