Regulation, Corporate Social Responsibility and Activism

• Author: Gerard Llobet,Aleix Calveras,Juan‐JosÉ Ganuza
• DOI: http://doi.org/10.1111/j.1530-9134.2007.00155.x
• Date: 01 September 2007
• Published date: 01 September 2007

Regulation, Corporate Social

Responsibility and Activism

ALEIX CALVERAS

Department of Business Economics

Universitat de les Illes Balears

Cra Valldemossa Km 7 07122 Palma de Mallorca, Spain

aleix.calveras@uib.es

JUAN-JOS ´

EGANUZA

Department of Economics and Business

Universitat Pompeu Fabra

C/Ramon TriasFargas 25-27 08005 Barcelona, Spain

juanjo.ganuza@upf.edu

GERARD LLOBET

CEMFI

C/Casado del Alisal 5 28014 Spain

llobet@cemfi.es

This paper analyzes the interplay between firms’ self-regulation (often denoted

as corporate social responsibility) as opposed to the formal regulation of a

negative externality. Firms respond to increasing activism in the market

(conscious consumers that take into account the external effects of their

purchase) by providing more socially responsible goods. However, because

regulation is the outcome of a political process, an increase in activism might

imply an inefficiently high externality level. This may happen when a majority

of non-activist consumers collectively free-ride on conscious consumers. By

determining a softer than optimal regulation, they benefit from the behavior of

firms, yet they have access to cheaper (although less efficient) goods.

We thank Guillermo Caruana, Humberto Llavador and a referee for helpful comments.

We also benefited from comments by audiences at Universitat Pompeu Fabra, CEMFI,

Universidad Carlos III, Universidad de Vigo, Universidad de Salamanca, WZB Berlin,

Universidad del Pa´ıs Vasco and the Conference on Public Services and Management in

Toulouse.We are particularly grateful to Vicente Ort´un and UPF’s Observatory for CSR for

thesupport at the initial stage of this project. Previous versions of this paper have circulated

under the title “Regulation and Opportunism: How Much Activism Do WeNeed?.” Juan-

Jos´e Ganuza acknowledges the hospitality of CEMFI and the financial support of the

Spanish Ministry of Science and Technology under project SEC2003-08080-C02-01. Aleix

Calveras gratefully acknowledges financial support of the Spanish Ministry of Education

and Science under grant SEJ-2004-07530-C04-04. The usual disclaimer applies.

C

2007, The Author(s)

Journal Compilation C

2007 Blackwell Publishing

Journal of Economics & Management Strategy, Volume16, Number 3, Fall 2007, 719–740

720 Journal of Economics & Management Strategy

1. Introduction

Traditionally, market failures have been addressed using formal regula-

tion. For instance, firms that produce goods that generate environmental

externalities have been subject to pollution taxes, quotas, and standards.

Recently, however, these public politics have been complemented with

private politics.1The rise of activism by consumers/citizens and the

phenomenon of corporate social responsibility (CSR) have thus changed

the way economics regard the control of externalities.2To the extent

that some conscious consumers (which we call activists) take into

account in their purchasing decisions the social behavior of the firm,

a profit maximizing firm may go beyond the regulatory requirements

by choosing more expensive production technologies that reduce its

externalities.3

As Baron (2003) puts it, the choice between public and private

politics is strategic. This is precisely the aim of our paper; to study

whether private and public politics are really substitutes or not, and

the overall result of this interaction over social welfare. We study this

interaction in the context of the build-up of a negative externality (e.g.,

pollution) as a by-product of the consumers’ purchasing decision. Our

results show that if private politics are controlled by activist consumers,

but public politics are in the hands of nonactivist voters, a free-riding

equilibrium can arise. The reason is that nonactivists benefit from a

loose regulation. This regulation (or lack of it) allows nonactivists to

buy cheap goods at the expense of a higher aggregate externality, and

hence they shift the burden of the reduction of the externality to the

conscious purchasing decisions of activists. As a result, a society with

consumers heterogeneous in their degree of activism might suffer from

a higher externality than a more homogeneous (even if less conscious

overall) society which would rely mainly on formal regulation. In other

words, more activism may imply, in some cases, that self-regulation

inefficiently crowds out formal regulation.

At the heart of our analysis is the activism of consumers. By

activism, we denote the extent to which an agent internalizes the ex-

ternalities generated by his consumption when deciding which product

1. According to Baron (2003) “The term private means that the parties do not rely on

public order,i.e. lawmaking [...].The term politics refers to individual and collective action

[...]”

2. See, for instance, Carroll (1979) and McWilliams and Siegel (2001) on the corporate

social responsibility of the firm from a managerial perspective.

3. The notion of CSR is highly controversial in the literature. In this paper, we denote

as socially reponsible firms those that take actions consistent with the definition used by

the UK’s Department of Trade and Industry: “The voluntary actions that business can

take over and above compliance with minimum legal requirements, to address both its

own competitive interests and interests of the wider society.”