A Positive Theory Of Moral Management, Social Pressure, And Corporate Social Performance

A Positive Theory Of Moral Management, Social Pressure, And Corporate Social Performance

2006Working Paper No. 1940

This paper provides a theory of firm behavior motivated by moral duty, self-interest, and social pressure. A morally-managed and a self-interested firm compete in a market in which their corporate social performance (CSP) provides product differentiation. In addition to acting as consumers, citizens have warm glow preferences for personal giving to social causes, holding shares in firms providing CSP, and contributing to social pressure to increase CSP. Social pressure is delivered by an activist NGO funded by voluntary contributions by citizens. The activist selects a target, demands social action by the target, and threatens harm. The target can fight the activist campaign, but both parties have an incentive to bargain to a resolution. The model charaterizes an equilibrium in the product market, the capital market, and the market for social pressure. The equilibrium establishes a price for CSP and for activist-induced social action. The theory provides predictions of the market values of firms, the prices of products, firm profits, target selection, contributions to the activist, and the amount of CSP. For example, if citizens do not distinguish between morally-motivate CSP and CSP induced by social pressure, the activist is more likely to target the softer, morally-motivated firm. Higher quality activists are better funded, target self-interested firms, and obtain greater social action. Lower quality activists target morally-managed firms.

Keywords
corporate social responsibility, Politics, microeconomics