Paper: Individual and Corporate Social Responsibility (Benabou & Tirole 2010)

Question 1

Background: Traditional View

Answer 1

Traditional View (see Friedman):

• “invisible hand of market” enhances efficiency while individuals act in their own interest
• State corrects for market failures

Question 2

Background: demand for individual and corporate social responsibility nowadays which could be due to:

Answer 2

• companies’ practices are now more transparent
• Long-run cost of pollution (e.g. warming of atmosphere) has increased

–> Answer is emphasis on CSR by business leaders, governments and scientists

Question 3

Background: standard definition of CSR

Answer 3

CSR = sacrificing profits in the social interest.

For there to be a sacrifice, the firm must go beyond its legal and contractual obligations, on a voluntary basis

Question 4

Background: Motivation for CSR (why should society and firms substitute the government in its role):

Answer 4

Motivation for CSR (why should society and firms substitute the government in its role):

1. Government failure
2. Individuals may want to promote values that are not promoted by law

Question 5

The bright side of image concerns

Answer 5

Image concerns can be easily used to increase prosocial behavior by:

• Leveraging honor seeking by public praises, medals, awards (good behavior side)
• Leveraging stigma avoidance by internet “walls of shame” (bad behavior side)

Question 6

Darker side of image concerns:

Answer 6

• If publicity is increased, meaning of prosocial acts is rather attributed to image-seeking than to altruism
• Giving is distorted (verzerrt) by degree of publicity, e.g. people rather invest in hybrid cars than in energy-efficient furnace
• Run for social prestige is a zero-sum game: my increase in reputation is decrease of my neighbor at the same time. Thus, if everyone behaves prosocially there is no reputation effect. E.g. I buy a hybrid car to feel better => my neighbor feels worse. (here, see figure below)
• Good behavior in one situation may justify worse behavior in another.

Question 7

Overjustification effect

Answer 7

Over-justification effect: occurs when an expected external incentive such as money or prizes decreases a person’s intrinsic motivation to perform a task… the supply response to incentives flattens out, and eventually becomes downward-sloping

… When there is no or little reward, a prosocial act is interpreted as genuine altruism. As material incentives become more substantial, the ‘meaning’ of the act changes: it becomes more difficult to know to what extent it is motivated by altruism or by greed. As the incentive keeps growing, however, supply grows again as well.

Question 8

Vision 1

Answer 8

Vision 1: “Win-win” (“doing well by doing good)

• Idea: CSR makes firm more profitable
• Explanation: firms often suffer short-term bias (e.g. manager focus on short term profit)
• CSR is about taking long-term perspective to maximize profits
• Also, Strategic CSR (s.a., Baron 2001) = socially responsible actions which also increase the corporate value or future profits, e.g. special ethical guidelines that improve the image of a company and activities that increase the demand for its products

Question 9

Vision 2

Answer 9

Vision 2: “Delegated philanthropy (“the firm as a channel for the expression of citizen values”)

• Idea: Stakeholders are willing to pay money to achieve social goals
• Explanation: Philanthropy is delegated due to information and transaction costs that are lower for company (e.g. costumers buy fair-trade coffee at Starbucks instead of sending money to farmers)  firms acts prosocial on behalf of stakeholders
• Corporations profit as they attract customers and workers, improve their image, …
• this demand for CSR by stakeholders provides incentives for corporations to act good or just to signal doing good (dark side of image concerns), e.g. greenwashing (= disseminating a misleading picture of environmental friendliness)

Question 10

Fastest growing form of CSR is delegated philanthropy. Its main challenges:

Answer 10

o Free riding: individual vs collective rationality, most people declare themselves willing to pay to improve environment, but attitudes are different when it becomes concrete

o Information: consumers and employees need information about company; data collection or access is needed (e.g. rating agencies or value reports by firms)

o Defining what is socially responsible: e.g. NGOs reselling confiscated ivory will be frowned on by the public for behaving ‘immorally’, even when this move lowers the price of ivory and thereby discourages poachers

Question 11

Vision 3

Answer 11

• Idea: CSR actions not motivated by stakeholder’s willingness to sacrifice money to do good but by management & board members. E.g. firms donate to charity or institutions the board member likes.
• Criticized (e.g. by Friedman s.a.) since Board should spent its own money instead of the stakeholders if they care about environment etc.
• Corporate Governance implications, e.g. a broader mission of company than just maximizing shareholder value implies cost that reduces incentives for investors

Question 12

do the visions/motivations overlap?

Answer 12

• 3 visions of motivation for a firm for CSR
• the dividing line between the different notions of CSR – long-term perspective (vision 1), delegated philanthropy (vision 2) and insider initiated corporate philanthropy (vision 3) – may be elusive.
• They may overlap (firms can have more than 1 motivation)

Question 13

Empirics on CSR

Answer 13

• Most studies indicate no or slightly positive correlation between CSR and corporate performance
• > difficulty: Which theory (vision, see above) is tested? Vision 1 and 2 imply positive correlation, vision 3 negative