The Role of Public Information in Corporate Social Responsibility

• Author: Juan‐José Ganuza,Aleix Calveras
• Date: 01 December 2016
• DOI: http://doi.org/10.1111/jems.12156
• Published date: 01 December 2016

The Role of Public Information in Corporate Social

Responsibility

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

Many of the attributes that make a good “socially responsible” (SR) are credence attributes that

cannot be learned by consumers either through search or experience. Consumers, then, use for

their purchasing decisions “noisy” information about these attributes obtained from potentially

contradictory channels (media, advertisement, NGOs). In this paper we model such informational

framework and show the positive relationship between the accuracy of the information transmitted

to consumers and corporate social responsibility. We also show that a firm may be tempted to

add noise to the information channel (through lobbying of the media), which might reduce the

supply of the SR attributes and even harm the firm itself (with lower profits). It might then be

profitable to the firm to commit ex ante to not manipulate the information regarding the firm’s

business practices (e.g., with a partnership with an NGO). Finally, we extend our model to a

competition framework endogenizing the number of firms active in the SR segment. We show

both that in more transparent markets a larger number of firms will be SR, and that in a market

with more intense competition, a higher degree of transparency is required in order to sustain a

given number of SR firms.

1. Introduction

Many of the attributes that make a good or a service “green” or, moregenerally, socially

responsible (SR), are credence attributes, not directly observable by consumers, who

cannot learn about them either through search or experience (Nelson, 1970; Tirole, 1988;

Baron, 2011). Examples of such attributes are numerous: the conditions under which

the product is produced (including any externalities associated with production, for

example, pollution and how workers are treated and how well they are paid), hidden

hazards associated with consumption of the product, etc.

We are grateful for comments by the co-editor, two anonymous referees, seminar participants at FEDEA

and Universidad de Salamanca, and the conference attendees at the JEI (Madrid) and the EARIE conference

(Istambul). Naturally, all errors are ours. Aleix Calveras gratefully acknowledges financial support of the

Spanish Ministry of Economics and Competitiveness under grant ECO2013-48496-C4-1-R. Juan-Jos´

e Ganuza

gratefully acknowledges the support of the Barcelona GSE Research, the government of Catalonia, and the

Spanish Ministry of Education and Science Through Project ECO 2011-28965 and ECO2014-59225-P.

C2015 Wiley Periodicals, Inc.

Journal of Economics & Management Strategy, Volume25, Number 4, Winter 2016, 990–1017

Public Information in Corporate Social Responsibility 991

This asymmetry of information between a firm and its customers (and other stake-

holders) regarding the firm’s business practices poses a threatto the viability of corporate

social responsibility (CSR).1CSR is mainly driven by demand of “conscious” consumers

(namely, consumers who value one of these SR credence attributes, and are willing to

pay a higher price for a good that includes them) and, thus, the level and accuracy of

the information available to consumers is key.2Absent credibleinformation, the market

might fail to provide the credence attributes valued by consumers: if consumers are un-

certain about the attributes of the good, then they might not be willing to pay a premium

for it and, thus, firms will not supply such attributes in the first place (Akerloff, 1974).

Thus, the level of credible information available to consumers (firm’s stakeholders in

general) with respect to firm’s business practices is key in the development of CSR. And

the purpose of this paper is precisely to study the role of informational issues in the

promotion of CSR. More specifically, we want to analyze:

(i) In which way the level of information accuracy (or lack of it) in the market impacts

in the ability and incentives of firms to invest in corporate social responsibility. We

consider that consumers receive information from several channels (with potentially

contradictory messages; e.g., from the media, NGOs, and firms themselves) and that

they aggregate it in a noisy signal. It is thus important to assess in which way the

quality of the signal impacts on firms’ incentives to invest in social responsibility,

and we do so considering different levels of market competition among SR firms.

(ii) How information about the behavior of the firm is produced and the incentives of

agents to provide it. The number of agents that (may) play a role in the transmission

of information to consumers on businesses’ practices is wide; in particular, we focus

on the incentives of a firm to manipulate the information provided to consumers

(through advertisement, media, etc.) and the consequences it has on CSR.

(iii) The role of regulation and, specially, other decentralized institutional arrangements

such as a firm’s partnership with an NGO, in order to promote transparency and

indirectly foster CSR.3

Our modeling framework thus allows us to discuss in which way the accuracy

of the information that consumers receive influences the incentives of firms to be SR,

specifically by investing in a clean and more expensive technology (rather than in the

standard, dirty, and cheaper one). We do the analysis first in the benchmark model in

which only a single firm may differentiate and become SR, and then also in a framework

where we endogenize the number of firms that may differentiate and become SR. When

competition in CSR is considered, in addition to the impact of market transparency,

1. By CSR, we denote those “voluntary actions that firms take over and above compliance with minimum

legal requirements, to address both its own competitive interests and the interests of the wider society” (as

defined by the UKs Department of Trade and Industry).

2. Evidence regarding the valuation by some conscious consumers on some credence attributes (and who

are willing to pay a higher price for them) can be found in relation to the labor conditions of a firm (Hiscox and

Smyth, 2009), to charity linked products (Elfenbein and McManus, 2007), or the environmental friendliness of

a product (Casadesus-Masanell et al., 2009). See also, for instance, Mohr et al., 2001, and Murray and Volgel,

1997).

3. An example of a transparency regulation is the European Union Directive 1999/94/EC which requires

car makers to inform consumers on fuel economy and CO2emissions of each car, as part of a “an overall

Community strategy aimed [ . . . ] to reduce CO2emissions, in particular those caused by passenger cars”

(EU Directive 1999/94/EC). More specifically, the labeling Directive requires the display of a label on fuel

consumption and CO2emissions on all new cars, the publication of national guides on the fuel efficiency and

emission of CO2of new cars, the display of posters at the dealerships, and the inclusion of fuel efficiency and

CO2emissions information in printed promotional literature.