Corporate social responsibility and product quality

Date01 October 2018
Published date01 October 2018
DOIhttp://doi.org/10.1111/jems.12264
804 © 2018 Wiley Periodicals, Inc. wileyonlinelibrary.com/journal/jems J Econ Manage Strat. 2018;27:804–829.
Received: 17 June 2016 Revised: 2 August 2017 Accepted: 15 March 2018
DOI: 10.1111/jems.12264
ORIGINAL ARTICLE
Corporate social responsibility and product quality
Aleix Calveras1Juan-José Ganuza2
1Department of Business Economics, Uni-
versitat de les Illes Balears. Cra Valldemossa,
Palma de Mallorca, Spain
2Department of Economics and Business,
UniversitatPompeu Fabra. C/Ramon Trias
Fargas,Barcelona, Spain
Correspondence
AleixCalveras, Department of Busi-
nessEconomics, Universitat de les
IllesBalears. Cra Valldemossa Km
707122 Palma de Mallorca, Spain.
Email:aleix.calveras@uib.es
Abstract
We study both theoretically and empirically the relationship between different types
of corporate social responsibility (CSR) and a firm's product quality. On the one hand,
observable external CSR (e.g., a firm's involvementin a social project) can be used as a
signal to unobservable product quality. On the other hand, internal CSR (e.g., human
resources practices such as training and labor stability) can improve a firm's labor
productivity, specially in firms supplying high quality. We show that CSR may serve
as a tool for a firm's product differentiation strategy, finding that both internal and
external CSR enhance a firm's product quality. Moreover, this implies the existence
of complementarity between internal and external CSR (they mutually reinforce each
other) through product quality. We test our theoretical results with data from the hotel
industry where we show that hotel establishments with a higher product quality are
indeed more likely to be socially responsible, both internally and externally, indicative
of the existence of complementarity.
KEYWORDS
asymmetric information, complementarity, corporate social responsibility, quality, tourism
JEL CLASSIFICATION:
L14, L83
1INTRODUCTION
This paper deals with a core firm problem, namely, how to define a firm's product differentiation strategy. Corporate social
responsibility (CSR) and product quality are two important dimensions to design such strategy and to differentiate from com-
petitors. CSR practices are considered to be all those voluntary firm actions designed to improve social or environmental con-
ditions (i.e., the adoption of environmental management practices).1To the extent that some “conscious” consumers are willing
to pay for the presence of such practices behind the products they buy, CSR can be considered as one additional dimension of
product quality and, hence, its analysis does not differ from the other more standard dimensions of product quality. Our focus
is, however, another channel through which CSR may play a role in a firm's product differentiation strategy: as a signal device
of unobservable dimensions of product quality.
Asymmetric information between firms and consumers prevent in many marketseffective firm differentiation strategies based
on the supply of higher product quality.I ti str ue that some CSR practices such as, forinstance, t he labor conditions existingin a
firm's third world suppliers, also suffer from such asymmetric information problem. Other CSR practices such as, for instance, a
We benefited from comments by an anonymous referee,a coeditor, and audiences at JEI 2014 and ACEDE 2012 and EARIE2015. Aleix Calveras gratefully
acknowledgesfinancial support from the Agencia Estatal de Investigación (AEI) and the European Regional Development Funds (ERDF) under grant ECO2017-
86305-C4-1-R (AEI/ERDF, EU). Juan-José Ganuza acknowledgesthe financial support of the Barcelona GSE Research and the Spanish Ministry of Education
and Science through projects ECO2014-59225-P and FUNCAS.
CALVERASAND GANUZA 3
805
firm's involvement in a social project, are, however, observable to consumers. The question we address in this paper is whether
a firm may indeed use such observable CSR to overcome the problem of asymmetric information in supplying quality. We
identify a natural condition over consumer preferences that leads to the use of observable CSR as a signal of product quality. In
particular, if consumers value more CSR practices when supplied by a firm selling high-quality goods, then, observable CSR
can be used as a signal and reduce the asymmetric information problem of quality supply, enhancing social welfare even when
the cost of such CSR practices is higher than its direct social benefits (consumer valuation). We believe such a role of CSR
in firms' product differentiation strategies provides a major explanation to the increasing role that CSR takes in many firms'
marketing efforts. As it will become clear below, our theoretical analysis relies on the assumption (Assumption 1 below) that
CSR attributes increase their value when they are attached to a high-quality good. Although we do not claim that this assumption
holds across all markets, we believe it is a valid approach for many industries, for instance, the hotel industry that we study in
our empirical analysis below. Thus, we would think of a consumer guest of a five-star hotel likely being more concerned about
the environmental impact of his or her own accommodation than a consumer at a low cost hotel.
Our analysis of CSR and product quality also dives into the multidimensionality of CSR, analyzing in which way various
CSR dimensions interact with product quality and among themselves. To providejust a few examples, CSR practices range from
several forms of environmental management tools (that focus in pollution control, energy saving, and waste management), to
codes of conduct for the corporation's third-world suppliers (that, for instance, ban child labor), and passing by human resources
practices such as employee training and labor stability. One classification of CSR practices is provided by the Green paper of
the EC on CSR (2001), which divides CSR policies into two dimensions, the internal one (mainly involving human resources
policies, health and safety at work, environmental impact management, etc.), and the external dimension (local communities,
suppliers, customers, human rights and supply chain, ecological issues, etc.).2We follow this classification and categorize CSR
as being either external or internal, discussing in which way do these different CSR business practices relate to each other.
We denote as external CSR those observable practices to consumers that may play a role in signaling quality, as we discussed
above. In a market in which consumers are ex ante uncertain about the quality of a good (an experience good; Nelson, 1970),
they may use observable external CSR practices (i.e., charity donations, a firm's involvement in a social project) to infer on the
unobservable dimensions of product quality. External CSR, then, beyond the direct value that some consumer segments may
pose in it, may become an indispensable part of a firm's strategy willing to position itself in the upscale-premium quality market
segment.
Internal CSR, instead, are those business practices that have a social impact on internal stakeholders, mainly, employees
(e.g., high commitment human resources practices such as training, labor stability, employeepar ticipation, high wages), and we
assume that such internal CSR is not observed by consumers and has no direct impact on consumer's utility function. As we
take the stand of considering CSR being “strategic,” whereby CSR is motivated by an effort of the firm to gain a competitive
edge over rivals (as opposed to “altruistic CSR”; see Baron, 2009), the only way to rationalize internal CSR is through its effect
on efficiency. Accordingly, we assume that undertaking internal CSR reduces the cost of producing high-quality products (i.e.,
investing in training and labor stability may increase employee's productivity, whereby reducing the costs of producing high
quality).
The question, then, given this assumed complementarity between internal CSR and product quality, is whether there is also
a complementarity between external and internal CSR or, rather, they are substitutes. In other words, a firm being socially
responsible in one dimension, is it more or less likely to be socially responsible in the other dimension? To our knowledge,
this is the first paper to dive both theoretically and empirically into the multidimensionality of CSR and our results show that,
even though a priori unrelated, external and internal CSR exhibit complementarity through their relation with product quality.
Namely, the signaling role of external CSR for high-quality products, and the efficiency enhancement of internal CSR in firms
offering high-quality products (e.g., socially responsible human resources practices such as training are more valuable to a firm
offering high-quality goods) create complementarity among them, generating a clustering of these two types of CSR practices.
The first part of the paper presents a theoretical model where a firm sells a good whose quality can be high or low. Such quality
depends on whether the firm has made an investment or not. Quality is not directly observable to consumers, who, however,
do obtain a public noisy signal on such quality. The firm may also choose to be socially responsible in one or two dimensions,
external and internal. In the model, external CSR consists of attaching to the good an observable CSR attribute valued by
consumers, an attribute possibly used by the firm as a way to signal to consumers that the good it is selling is one of high
quality. Quality and external CSR are not linked through the production process but we assume supermodularity in consumer
preferences with respect to both dimensions. Internal CSR is neither observed nor valued by consumers, but it reduces the cost
of high quality.
We solve the perfect Bayesian equilibrium of the game and show that when there is not enough information available to
consumers about the quality of the good (as it may happen for an experience good), and in the absence of CSR, it is likely that

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