Corporate Social Responsibility and the Economics of Consumer Social Responsibility Fabrice Etilé, Sabrina Teyssier To cite this version: Fabrice Etilé, Sabrina Teyssier. Corporate Social Responsibility and the Economics of Consumer Social Responsibility. 2012. hal-00749355 HAL Id: hal-00749355 https://hal.archives-ouvertes.fr/hal-00749355 Preprint submitted on 7 Nov 2012 HAL is a multi-disciplinary open access L’archive ouverte pluridisciplinaire HAL, est archive for the deposit and dissemination of sci- destinée au dépôt et à la diffusion de documents entific research documents, whether they are pub- scientifiques de niveau recherche, publiés ou non, lished or not. The documents may come from émanant des établissements d’enseignement et de teaching and research institutions in France or recherche français ou étrangers, des laboratoires abroad, or from public or private research centers. publics ou privés. ECOLE POLYTECHNIQUE CENTRE NATIONAL DE LA RECHERCHE SCIENTIFIQUE CORPORATE SOCIAL RESPONSIBILITY AND THE ECONOMICS OF CONSUMER SOCIAL RESPONSIBILITY Fabrice ETILE Sabrina TEYSSIER November 6, 2012 Cahier n° 2012-31 DEPARTEMENT D'ECONOMIE Route de Saclay 91128 PALAISEAU CEDEX (33) 1 69333033 http://www.economie.polytechnique.edu/ mailto:[email protected] Corporate Social Responsibility and the Economics of Consumer Social Responsibility November 6, 2012 Fabrice Etiléa,b and Sabrina Teyssiera,# a. INRA, UR1303 ALISS, F-94200 Ivry-sur-Seine, France. b. Paris School of Economics, F-75600 Paris, France. Abstract The promotion of Corporate Social Responsibility (CSR) is likely to depend on consumers’ purchase behaviors. While many consumers like the idea of social responsibility, the responsible consumption remains at a low level. This survey analyses two main barriers to responsible consumption: the willingness-to-pay for it, which relates to consumer social preferences; and the information asymmetry between companies and consumers. The economic literature shows that consumer social preferences are related to altruistic, self-image and social image concerns. Only consumers with strong social preferences and a low marginal utility of income (a high income) are likely to purchase CSR products. Moreover, purchase decisions crucially depend on the existence of labels, which truthfully identify the CSR products. Public policies may promote consumer social responsibility through education programs, enhancement of self- and social-image concerns, and careful label regulation. Keywords: corporate social responsibility, consumer, social preferences, asymmetric information, labels. JEL codes: L15, M14, D03, D82. # Corresponding author: INRA – ALISS, UR 1303, 65, Boulevard de Brandebourg, 94205 Ivry-sur-Seine cedex, France. E-mail: [email protected]. Please note that the usual disclaimer applies: this survey does not reflect the view of the Institut National de la Recherche Agronomique or the Paris School of Economics. The opinions expressed here are under the sole control of the authors. We thank Bruno Roche for constructive discussions. Sabrina Teyssier acknowledges support of the chair FDIR (chair for sustainable finance and responsible investment). 1 1 Introduction The European Commission defines Corporate Social Responsibility (CSR) as “a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis” (European Commission 2001).1 It sees CSR as a tool that would help reconcile economic, social and environmental ambitions, and “wishes to give greater political visibility to CSR, to acknowledge what European enterprises already do in this field and to encourage them to do more” (European Commission 2006). CSR implies the use of social-, environmental- and health-friendly technologies during the production process and the incorporation of these technologies into the product itself.2 The spectrum of activities covered by CSR is likely to be large, as social responsibility requires that attention be paid to many stakeholders, including the company’s stock holders, suppliers, employees, customers, and all individuals and communities that may be affected by its decisions. Corporate Social responsibility is reminiscent of considerations of externalities associated to private actions in public economics. In most cases, CSR activities aim at reducing negative externalities, such as pollutant emissions or the variability of farmers' income. In some cases, positive externalities are produced, as in the financing of technological transfers to local farming communities, or school building. A standard result in public economics is that public goods are underprovided by voluntary contributions (see, among others, Bergstrom et al. (1986), Cornes and Sandler (1996), Palfrey and Rosenthal (1984) and, Ledyard (1995) for a survey). Hence, from a neo-classical point of view, favoring the development of CSR has three key advantages. It may help to solve some market imperfections, such as the externalities generated by market activities. It may increase the local provision of public goods in an efficient, decentralized, manner. A priori, state intervention is kept at a minimum, and so are market distortions. The provision by the government of public goods may for instance imply incomplete crowding-out of private provision of public goods (Frey and Jegen (2001) and Nyborg and Rege (2003)) and also of charity fund-raising (Andreoni and Payne 2003) which leads to inefficiencies. One way to help the development of CSR is to improve stakeholders’ demand for CSR. Consumers are an active part of these stakeholders whose demand for products satisfying 1 Quoted in Renaut (2003). 2 Such incorporation can be material as in aerosol products with no fluorocarbons, or just symbolic as in fair- trade coffee. 2 characteristics of CSR is key.3 From the economist’s point of view, ‘CSR products’ are both private goods and public goods. Their consumption produces some private hedonic benefits, but consumers can also derive utility from knowing that the firm is committed to care for the well-being of their suppliers and their employees or for the environment, i.e., that it produces some public good alongside the product supply chain (Besley and Ghatak 2007). Whether the consumption of CSR products leads to additional welfare gains for consumers, as compared to standard products, depends on two conditions. First, consumers must grant some value to the public good aspect of their purchase. Second, they must be well informed about the quantity of public good that has been incorporated into the product during the production process. The current survey presents the economic approach of consumers’ response to CSR. It complements marketing- and psychology-based insights into this question, by focusing on the two main economic barriers to CSR consumption: (i) the consumers’ subjective valuation of CSR, and (ii) the information asymmetry between companies and consumers. Understanding and breaking down these barriers is a key issue, because companies’ involvement into social responsibility is partly determined by the prospect of not loosing profits or expanding market opportunities. In this perspective, we show that the development of CSR may be favored by appropriate public policies. Although there exists no universal definition of CSR (Crane et al. 2008), in the economics literature Bénabou and Tirole (2010) differentiate three views of CSR. The ‘win- win’ vision supposes that CSR increases profits created by a refocus of managers on long- term profits rather than short-term profits. This vision is along the same lines as the ‘strategic CSR’ defined by Baron (2001) where CSR increases profits because the socially responsible firm improves her market position and then long-term profits. The ‘delegated philanthropy’ vision considers that economic agents use the firm as a channel for their donation deeds and then for their social responsibility. This vision is consistent with profit maximization as management takes decisions to respond to the demand. The ‘insider-initiated corporate philanthropy’ vision supposes that CSR decreases the firm’s profits as here CSR comes from the management board’s decision to donate and sacrifice money.4 This last vision has been 3 In an analysis of the food sector, Hartmann (2011) underlines the importance for CSR development of perception and behavior of consumers regarding CSR. 4 The management literature makes a clear distinction between altruistic and strategic CSR. Lantos (2001) makes a finer distinction between ethical CSR – avoiding societal harms –, altruistic CSR – doing good works at possible expense to stockholders –, and strategic CSR – good works that are also good for the business. From the consumer’s point of view, it may indeed matter whether he perceives the firm involvement into socially responsible activities as purely strategic or driven by genuine altruism. Corporate social responsibility may then be motivated by two lines of arguments: pure, intrinsic, altruism on the one hand, which often requires that part 3 attacked by economists in the same vein as Milton Friedman who considers that maximizing profits is the firms’ social responsibility (Friedman 1970). Friedman argues that the decision to make CSR expenses belongs to managers while stockholders should be the deciders and then creates moral hazard from which inefficiency may ensue. The vision we adopt in this paper is essentially the ‘delegated