Social Capital and the Viability of Nonprofit Firms: Evidence from Norwegian Savings Banks

Hansmann (1996) points out that a surprisingly large number of nonprofit firms operate in developed economies, often in sectors where they compete with for-profit firms. In this paper, we shed new light on the viability of nonprofit firms by studying the survival of nonprofit savings banks in the Norwegian banking industry after branching deregulations in the mid-1980s. We propose that banks’ survival is related to the level of social capital in the local communities in which the banks operate. Using newspaper readership and charity donations to proxy for the amount of social capital, we estimate that an increase in social capital from the minimum to the maximum level observed in the sample increases the probability of survival for the average bank by approximately 10 percentage points at the time of deregulation. The result is robust to controls for, among others, bank equity, bank competition, population age and education. Our findings suggest that social capital may facilitate collective decision-making and the alignment of stakeholders’ preferences.