This paper examines whether institutional investors mitigate social costs that arise when government services are outsourced to private enterprises. Using hand-collected data on U.S. prisons, I find that privatization is associated with an increase in prisoner suicides by up to 39%. However, institutional investors of public companies managing private prisons decrease suicide rates by one third. These effects are stronger for long-term institutional investors since failing to internalize social externalities negatively impacts the long-term success of portfolio firms. Evidence from a tax reform that exogenously increases institutional ownership of prison management companies suggests that the relationship between ownership and social outcomes is causal. To explain these results, I show that institutional investors have incentives to be socially responsible due to litigation and reputation risks.
Keywords: Institutional Investors, Corporate Social Responsibility, Social Welfare
JEL: A13, G23, G32, H11, L33
