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Titre: THE ECONOMICS OF CORPORATE SOCIAL RESPONSIBILITY: A FIRM‐LEVEL PERSPECTIVE SURVEY

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doi: 10.1111/joes.12055

THE ECONOMICS OF CORPORATE SOCIAL
RESPONSIBILITY: A FIRM-LEVEL PERSPECTIVE
SURVEY
Patricia Crifo
University Paris-West Nanterre,
Ecole Polytechnique and CIRANO
Vanina D. Forget
Ecole Polytechnique and AgroParisTech Engref
Abstract. This paper analyzes the economics of Corporate Social Responsibility (CSR), as a private
response to market imperfections in order to satisfy social preferences. Depending on whether they
affect regulation, competition or contracts, market imperfections driving CSR decisions are classified
in three categories: public goods and bads and altruism; imperfect competition; and incomplete
contracts. We successively present these drivers of CSR decisions and highlight the nature of incentives
(external or internal) at work and the testable (and tested) hypotheses in the reviewed studies. We
finally review the link between CSR and financial performance, as well as between CSR and social
and environmental performance. A twofold discrepancy appears in the literature, opening future
research paths: a disconnection between our understanding of CSR drivers and CSR impacts; and
a knowledge gap between CSR financial and social consequences, the latter having received little
attention.
Keywords. Corporate Social Responsibility; Firm Strategy; Market Imperfections; Review

1. Introduction
Over the past two decades, corporations have struggled to become, or at least to appear, as socially
responsible. Witnessing this shift, almost two-thirds of the biggest firms in industrialized countries now
publish a report on Corporate Social Responsibility (CSR) or on sustainable development policies (KPMG,
2011). At the same time, a considerable attention has been given in the literature to the definition of CSR,
the analysis of its determinants and the measure of its impact on firm performance, especially in the field
of management sciences and economics of organizations.
Multiple CSR definitions have been proposed, either from an economic (Heal, 2005, 2008; Baron,
2007; B´enabou and Tirole, 2010) or a managerial perspective (Carroll, 1979; McWilliams and Siegel,
2000, 2001). This paper takes a clear and practical stand by using the CSR definition proposed by the
European Commission (2011) for which being socially responsible means that, beyond legal constraints,
firms take responsibility for their impacts on society. In other words, CSR means firms go beyond the
law and integrate social, environmental, ethical, human rights and consumer concerns into their business
operations and their core strategy with the double aim of maximizing the creation of shared value for their
shareholders and stakeholders; and identifying, preventing and mitigating their possible adverse impacts.
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A prerequisite is the existence of social preferences, whereby at least one type of stakeholder (consumers,
employees, shareholders, regulators, managers, suppliers, etc.) values CSR and therefore asks firms to
undertake socially responsible activities.
Hereby the reality of the CSR concept is utterly complex and analyzing why firms would engage in
CSR and what are its actual impacts is far from trivial. The broadness of the literature dealing with CSR
reflects this complexity. In this paper, we present a survey of the theoretical and empirical literature on
the determinants and consequences of CSR using an economic lens and a firm-level perspective. We
give coherency to the literature by proposing a theoretical framework in which CSR decisions are made
as an answer to market imperfections. When markets are perfect (due to perfect competition, perfect
information and perfect rationality), production and exchange lead to efficient outcomes. In this context,
the well-known argument of Friedman (1970) states that ‘there is one and only one social responsibility
of business: to use its resources and engage in activities designed to increase its profits so long as
it stays within the rules of the game that is open and free competition without deception or fraud’.
However, markets inherently experience imperfections in reality. In neoclassical welfare economics,
market imperfections (such as externalities, public goods, market power or asymmetric information)
represent a standard justification for government action, provided that such action does not crowd out
private initiatives. Yet, government failures can mitigate or even hamper the achievement of Pareto optimal
outcomes. Hereby neither market nor government imperfections can be analyzed in isolation (Keech
et al., 2012).
When both markets and governments fail to provide the optimal outcome, room is then left for private
firms to undertake socially responsible activities as a response to such imperfections, that is, to go beyond
legal requirements in order to satisfy social preferences from at least one type of stakeholders. In our
approach, social preferences are necessary (as a prerequisite in the definition of CSR) but not sufficient
to explain the determinants of CSR strategies. Indeed, we present a theory of CSR strategies as private
responses to market imperfections aiming to satisfy social preferences from specific stakeholders grouped
into three main categories, depending on whether market imperfections affect regulation, competition or
contracts. Figure 1 illustrates our framework.
Market imperfections affecting regulation arise from the existence of externalities, public goods and
altruism. In this case, as detailed later in section 2, CSR is driven by incentives or external pressure
emanating from stakeholders in the firm’s environment such as regulators, activists, nongovernmental
organizations (NGOs) or altruists. Market imperfections affecting competition are grounded in product
differentiation, asymmetries and market contestability. In this case, as developed later in section 3, CSR
strategies are driven by incentives in the firm’s market structure, based on competitive pressure emanating
from consumers, competitors or reputation concerns. The third category of market imperfections relies on
contract incompleteness. In the incomplete contract literature (Hart, 1995), bounded rationality and
imperfect information imply that contracts are inherently incomplete thereby requiring to allocate
discretionary power (and authority) to firms’ executives. In this case, as described later in section 4,
by letting executives exercise their discretion in such a way as to favour the interests of stakeholders
other than shareholders, CSR strategies are driven by incentives in the firm’s agency relationship with its
stakeholders, based on internal (delegated or organizational) pressure from shareholders, employees and
directors.
Insightful reviews of the literature on the determinants and impacts of CSR strategies have recently
been proposed. Kitzmueller and Shimshack (2012) propose, for instance, a taxonomy of CSR decisions
shifting from the public economics argument (CSR as a private provision of public goods and curtailment
of public bads) to the motivational argument (CSR as a horizontal taste parameter with private character).
Depending on whether shareholders and other stakeholders have social preferences or not, this taxonomy
leads to two types of CSR strategies: not-for-profit and strategic CSR. B´enabou and Tirole (2010) also
highlight prosocial preferences and motivations as a key factor to disentangle strategic from nonstrategic
CSR. Reinhardt et al. (2008) similarly focus on the relevance of strategic CSR and review whether
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Market imperfection affecting:

Competition

Regulation

Contracts

Corporate Social Responsibility driven by:

Incentives in the firm’s
environment
(mechanism: external
pressure)

Incentives on the firm’s
market
(mechanism: market
structure)

Incentives in the firm’s
agency relationship
(mechanism: internal
delegation)

Theoretical assumptions:

Externality internalization,
public good provision OR
pro-social behaviours

Imperfect competition

Contract incompleteness

Testable hypotheses:

Policies responsive to public
politics / to private politics
Pro-social behaviours

Product differentiation
Competitive strategies
Greenwashing and reputation

Delegated responsibility of
shareholders / employees /
directors

Figure 1. A Theory of CSR Strategies Based on Market Imperfections.

firms may, can or should sacrifice profits in the name of the social interest. These approaches are very
exhaustive, reviewing theoretical and empirical arguments supporting the strategic and nonstrategic theory
of CSR decisions based on social preferences of stakeholders (such as employees, consumers, activists
and governments) as well as managers’ social norms and image concerns.
Here, we adopt a different but complementary approach in which social preferences are key factors
to explain CSR decisions but need to be complemented by market imperfections, in particular imperfect
competition and incomplete contracts in addition to public economics and altruism. Building upon the
argument that ‘after 35 years of research and over 200 studies, there is a conclusive if perhaps unsatisfying
answer to the question of whether companies benefit financially from social performance’ (Margolis et al.,
2009), we consider that strategic CSR based on social preferences is necessary but not sufficient to explain
the whole range of CSR decisions. We thus depart from the dominant theme of strategic versus prosocial
CSR strategies to propose a complementary approach where CSR decisions build upon social preferences
but are driven by market imperfections (public goods and bads, altruism, imperfect competition and
incomplete contracts), highlighting the nature of incentives (external or internal) and testable (and tested)
hypotheses.
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Our approach differs from content and bibliometric analyses or meta-analyses, which generally
highlight dominant and influential themes, authors, institutions or journals in the literature (for the field of
environmental and ecological economics, see Hoepner et al., 2012). In particular, the strategic (financial)
motive of CSR has received a considerable attention in academic journals (see the content analysis of
Capelle-Blancard and Monjon, 2012 and the meta-analysis of Margolis et al., 2009). Our approach is
less exhaustive as we rather selectively review the most relevant studies to the unified theory of CSR we
propose. Henceforth, some articles are not only referenced on the basis of their citation impact, but also on
the basis of their analytical contribution and novelty. We briefly examine (see section 5) the link between
CSR and financial performance, but we also review the link between CSR and social and environmental
performance, an issue that has received little attention in the literature so far. Future research paths are
suggested in each section. We conclude on the main gaps identified in the literature (see section 6).

2. Externalities, Public Good Provision and Altruism
A first source of market imperfections driving CSR (see Figure 1) is the existence of externalities, public
goods and altruism. Most CSR activities, based in particular on environmental and social factors, in
fact aim at reducing negative externalities (e.g. pollution abatement) or generating positive externalities
(e.g. financing hospitals). In this case, CSR strategies are driven by incentives in the firm’s environment
to produce public goods or curtail public bads, based on external pressure coming from three main
stakeholders: regulators, activists such as NGOs, or altruists. We thus present in this section three types
of motivations for such market imperfection-driven CSR strategies: deterring public regulations or public
politics, responding to social pressure or private politics, or exerting one’s own moral duty to undertake
social activities.

2.1 CSR, Public Politics and Regulation Preemption
CSR may be considered as a Coasian solution to problems associated with social costs (Heal, 2005),
thereby allowing to save on transaction costs associated with regulatory processes. Alternatively, CSR
may be a direct response to regulatory failures. Indeed, Pigouvian taxes are only efficient if governments are
perfectly informed about individual preferences, technology and costs. Otherwise, they fail to efficiently
correct externalities and provide public goods. An important research stream, essentially theoretical, aims
at identifying the conditions under which CSR substitute to (thereby weakening) or complement (thereby
reinforcing) public regulations regarding the provision of public goods or curtailment of public bads.
In the dominant perspective, CSR may substitute to the regulation when it preempts it, that is, when it
helps avoiding future regulatory constraints. Lutz et al. (2000) show that if firms can commit to a quality
level before regulations are promulgated, the regulator is induced to weaken standards, and welfare falls.
By strategically sinking the costs of a technology that exceeds anticipated government standards by a
limited amount, the quality leader may hence influence the government to set a lower minimum quality
standard. Maxwell et al. (2000) also show that an increased threat of government (endogenous) regulation
induces firms to voluntarily reduce pollution emissions and produces weaker pollution regulation. In
both approaches, CSR acts as a self-regulation mechanism likely to preempt government regulation.
Among the scarce empirical tests of this mechanism, we can note the empirical case study of Arjali`es and
Ponssard (2010) and the econometric analysis of Brouhle et al. (2009). Using data from the metal-finishing
industry, the latter shows that participation in a voluntary programme for greenhouse gas reduction and
significant emission reductions were related to several forms of external pressure, including the regulatory
threat.
Yet, Maxwell and Decker (2006) note that many environmental investments seem to be aimed at
reducing the costs of complying with existing regulations (rather than preempting future regulations),
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thereby suggesting complementarity (mutual reinforcement) rather than substitutability (or competition)
between self-regulating CSR and (exogenous) regulatory restraints. In this case, the regulator acts as an
enforcer of existing environmental regulations and responds to voluntary environmental investments by
reducing the frequency with which it monitors the firm. The firm is motivated to take action because of
the reduction of its expected fine. Sam and Innes (2008) empirically support this reinforcement argument
by showing that participation in a toxic waste reduction programme (US 33/50) was motivated by the
expectation of relaxed regulatory scrutiny. Using data on approximately 4,000 facilities in seven OECD
countries, Johnstone and Labonne (2009) also provide strong evidence that environmental certification
serves as a signal to regulatory authorities.
Beyond reinforcement theory, CSR might also complement regulations in cases of government failures,
which have multiple origins (B´enabou and Tirole, 2010): for instance, capture by lobbies and other interest
groups; territoriality of jurisdiction (as for child labour, for instance); or a combination of inefficiency,
high transaction costs, poor information and high delivery costs. For instance, the regulator may share
the desire to reduce costs of regulation and thus be willing to negotiate voluntary agreements (Lyon and
Maxwell, 2008).
In sum, the literature has not provided so far a clear-cut answer on whether CSR substitutes or
complements regulation, and most proposed theories lack further empirical tests. To the best of our
knowledge, empirical analyses have been restricted to environmental corporate policies and further work
on social activities would thus be highly relevant.

2.2 CSR as a Response to Social Pressure and Private Politics
A second set of incentives in the firm’s environment driving CSR relies on the external pressure coming
from private actors such as social activists and NGOs, who seek to have firms produce public goods or
curtail public bads via targeted campaigns. Less responsible firms may hence be deprived of their ‘license
to operate’ via boycotts (Post et al., 2002). A recent example of this mechanism is the 2010 Greenpeace
‘Kit-Kat campaign’ (or ‘Nestl´e Killer – Give the orang utan a break’) against Nestl´e to stop the company
from using unsustainable palm oil.
The theory of contestable management states that anticipated threats of (endogenous) social protest
can effectively discipline a firm’s behaviour and induce CSR decisions. Using the instructive case of the
genetically modified organism industry boycott in France, Hommel and Godard (2001, 2002) consider
that a firm’s contestability is characterized by its exposure to two types of threats: contestation of its
social license to produce and innovate, based on environmental or health-related risks to the community
attributed to the firm’s products or processes; and economic contestation from competitors. Hence, a
corporate activity might become the target of social criticism when firms are significant actors on their
market and either are innovators or belong to notoriously dirty industries. The link between a firm’s
visibility on its market and its CSR level has been found in many empirical studies (Margolis and Walsh,
2001). As such, CSR can be a strategic policy to prevent social contestability and protect a firm’s long-term
interests (Hommel and Godard, 2001).
Yet, most often, social pressure is not directly exerted by citizens but rather by social activists, such as
NGOs. Defined by Baron (2001) as private politics actors, NGOs make direct demands on corporations
enforced either by threats (boycott, negative propaganda) or rewards (endorsements), without reliance
on public institutions or shareholders. Baron and Dirmeier (2007) highlight that threats are likelier than
rewards because they are more efficient at decreasing the level of the targeted activity. Sinclair-Desgagn´e
and Gozlan (2003) show, for instance, that when NGOs wield big threats, the necessity to reassure worried
stakeholders could force a firm to invest in accurate environmental reporting, whereas a weak threat by
an already confident stakeholder predicts that voluntary disclosure would be very vague. Focusing on
facilities reporting to a toxic release inventory from 1988 to 1994, Sam and Innes (2008) also find
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empirical evidence that participation in voluntary programmes and pollutant reductions were prompted
by a firm’s likelihood of becoming a target for boycott.
However, not all contestable firms become the target of social activists. Visibility is increased by the
extent of public contact, as in consumer-oriented industries (Margolis and Walsh, 2001). Notoriously
dirty industries are also more visible as they attract more public interest (Heal, 2005; Brown et al., 2006).
Siegel and Vitaliano (2007) add that firms selling experience goods (whose quality cannot be observed
before use, but is ascertained upon consumption, such as a book) or credence goods (whose quality cannot
be evaluated in normal use, such as organic coffee) are more likely to be socially responsible than firms
selling search goods (whose quality is easily ascertained, such as a plane ticket).
Novel works unveiled that NGOs do not necessarily target firms with the highest levels of negative
externalities. For instance, Baron (2009) highlights that if citizens do not distinguish between morally
motivated CSR and CSR induced by social pressure, the activist is more likely to target the softer, morally
motivated firm. Following this ‘soft firm hypothesis’, social activists may in fact target their campaign
against morally managed firms because they have more to lose from the campaign than do self-interested
firms. Empirically, support is shown by Baron et al. (2008) on a large sample of firms over the 1996–2004
period.
To summarize, social pressure appears in the literature as a major driver of CSR for large, consumeroriented or notorious firms which commit to it in order to protect their license-to-operate. Whereas
activists stand out as key actors in this mechanism, their role appears complex and would need deeper
understanding.

2.3 CSR, Altruism and Prosocial Behaviours
Finally, altruism and prosocial behaviours represent a third factor inducing CSR activities aimed at
providing public good and internalizing the firm’s negative externalities. For example, since 1985, the
outdoor company Patagonia has given 1% of revenue (sales, not profit), totalling $41.5 million, to
grassroots environmental organizations. Recent developments in psychology and behavioural economics
have been used to examine CSR as a behaviour of ‘sacrificing profits in the social interest’ (B´enabou
and Tirole, 2010). In this interpretation, CSR is a prosocial behaviour which reflects managers’
willingness to engage in philanthropic activities for altruistic reasons. Typically, this view corresponds
to Milton Friedman (1970)’s view that CSR amounts to spending others’ money for individual prosocial
motivations.
In fact, economic agents may want to promote values that are not shared by lawmakers. Because
preferences are heterogeneous, it is inevitable that some managers’ values will not be fully reflected in
policy and projected onto their corporate decisions. Prosocial behaviours result from several interacting
motivations, from intrinsic (genuine) altruism to extrinsic (material) motivation, social and self-esteem
concerns (B´enabou and Tirole, 2010). Image concerns may hence act as an incentive device to induce
responsible behaviours. For Baron (2010) as well, CSR may be viewed as self-regulation motivated by
moral concerns. More precisely, he characterizes the scope of self-regulation as a function of the form and
strength of moral preferences and analyzes how free-riding problems may be mitigated in this context.
Empirically, tests of managers’ prosocial behaviours most often merge with tests of the agency theory in
which CSR is considered as a management perquisite (Brown et al., 2006; Baron et al., 2008).
Yet, prosocial motivation may also be subject to offsetting effects. Searching out excessive social
prestige may crowd out the incentive provided by publicity on prosocial behaviours. The more advertised
CSR activities are, the more they might be discounted as mere image-seeking rather than altruism. In
this line, B´enabou and Tirole (2006) develop a theory of prosocial behaviour that combines heterogeneity
in individual altruism and greed with concerns for social reputation or self-respect. Moreover, ‘buying’
social prestige with CSR may be a zero-sum game.
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Interesting hypotheses are raised for behavioural economics in this alternative view of CSR, likely to
be set aside in the management and business spheres. Insights would certainly be gained by turning to
experimental economics, either in the laboratory or in the field.

3. CSR as a Business Strategy in Imperfect Competition
The second category of market imperfections driving CSR is imperfect competition (see Figure 1), in
particular based on product differentiation, information asymmetries and market contestability. CSR may
be an efficient tool to signal on credence goods attributes, compete with rivals and differentiate on the
market. This in turn may be considered as a ‘strategic CSR’ policy (Baron, 2001) aimed at gaining a
competitive advantage over competitors (Delmas et al., 2011). In this case, CSR strategies are driven
by incentives in the firm’s market structure, based on competitive pressure emanating from consumers,
competitors or reputation concerns.

3.1 CSR, Consumer Heterogeneity and Product Differentiation
If a firm can identify customers willing to pay for CSR (for fair trade products or environment-friendly
goods, for instance) and if it can defend the resultant niche against imitators, CSR in this context is like
any other forms of product differentiation, raising standard issues in marketing and industrial economics
relative to asymmetric information, economies of scale and intellectual property protection (Reinhardt
and Stavins, 2010).
A large number of articles consider CSR as a product differentiation strategy, in which firms privately
produce public goods to attract consumers willing to pay for ethical attributes (see, e.g. Becchetti et al.,
2005; Graff Zivin and Small, 2005; Baron, 2007; Besley and Ghatak, 2007). Empirically, opinion polls
indeed tend to report an increasing concern for ethical consumption (De Pelsmacker et al., 2005). For
instance, 46% European consumers claim to be willing to pay substantially more for ethical products
(MORI, 2000).
Consumer’s willingness to pay appears asymmetric between sinners and saints products (the former
inducing stronger reactions) and dependent on the CSR issue tackled, product quality and individual
factors (Sen and Bhattacharya, 2001). Loureiro and Lotade (2005) also reveal using a face-to-face survey
that consumers are willing to pay higher premiums for fair trade and shade-grown coffee labels than for
organic coffee. Yet, Giraud-H´eraud and Hoffman (2010) point out how consumers might be willing to
have safe and healthy food but are having difficulties to practically pay for it.
From this perspective, labels and certification have been shown to play a core role in product
differentiation strategies to reduce information asymmetry. Indeed, the CSR attribute of a good relies
on credence qualities which cannot be evaluated in normal use, and therefore need additional costly
information to gain consumers’ trust. Baron (2010) distinguishes the role of CSR assurance (certification)
from information (social labels). In his theory, social labels allow individuals with stronger moral
preferences to separate from those with weaker moral preferences, but are not able to expand the scope of
self-regulation beyond that with unconditional altruism. Certifications can do so and attract individuals
with both stronger and weaker moral preferences. Illustrating the efficiency of labels, Bjorner et al. (2004)
followed a panel of Danish consumers over 1997–2001 and quantified at 13–18% the price premium for
certified (the Nordic Swan) toilet paper. Similarly, Eichholtz et al. (2010) assembled a sample of about
10,000 US office buildings and evaluated that ‘green’ (energy efficiency) certification increased effective
rents by 7% and selling prices by about 16%.
CSR as a product differentiation strategy has thus been well investigated in the marketing, management
and industrial economics fields and little knowledge is to be expected from additional studies on specific
products or labels. New issues could, however, be raised from a wider and international perspective, for
instance, by focusing on the way consumers’ social preferences can spread and shape industries.
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3.2 CSR and Competitive Pressure
A related literature investigates whether competitive pressure destroys or enhances ethical behaviour and
whether CSR is compatible with price competition. For Shleifer (2004), when unethical behaviour cuts
costs, competition drives down prices and entrepreneurs’ incomes, thereby reducing their willingness to
pay for ethical conduct. Thus, unethical corporate behaviour might arise from competition rather than
pure greed. The dramatic collapse of the Rana Plaza garment fabric in Bangladesh in April 2013 and its
over 1,100 death toll brought to the forefront the reality of such mechanism.
Several papers, nonetheless, highlight that when firms compete for socially responsible consumers
by linking the provision of a public good to sales of their private goods, social activities can become a
by-product of product-market competition. Bagnoli and Watts (2003), for instance, show that the level
of private provision of public good varies inversely with the competitiveness of the private good market.
Fernandez-Kranz and Santalo (2010) empirically confirm this result and find that market concentration
appears negatively related to environmental and social ratings and increased competition due to higher
import penetration leads to superior CSR performance.
CSR activities may also be used to raise entry barriers and raise potential entrants’ costs. Enforced
social or environmental corporate policies can directly raise regulatory barriers for the firm’s competitors.
An insightful path is opened by Chambolle and Giraud-H´eraud (2005) who formalize product certification
as a nontariff barrier. By reducing competition intensity on the protected market, CSR entrance barriers
can increase firm profitability. An illustration is recounted in Lyon and Maxwell (2008): the Florverde
Programme would have enabled the European cut flower market suppliers to be chosen based on pesticides
use, thus inducing Columbian producers to promote environmentally friendly practices. However, beyond
specific case studies empirical evidence is scarce in the literature and would be welcome.
Competitive pressure and innovation race may also be another powerful lever for CSR strategies.
The famous Porter’s hypothesis (Porter and Van der Linde, 1995) upholds that environmental regulation
triggers innovation and production cost reduction (for instance, increased input/output efficiency), leading
to competitive advantage. Widely investigated empirical evidence on Porter’s hypothesis appears at
best mixed. Lanoie et al. (2011) use data on 4,200 facilities in seven OECD countries and find
strong support for environmental regulation stimulating environmental innovations. Wagner (2008)
also finds that environmental management systems are associated with process innovation, while
product innovations are more induced by information to consumers and ecolabelling. Yet, the recent
literature review of Br¨annlund and Lundgren (2009) tends to reject the Porter hypothesis in the general
case.
While a substantial body of work appears fairly optimistic about the positive role of competition on
CSR, the textile industry example clearly points out the need to better understand the limits of this model.
Empirical studies remain essentially focused on environmental issues. However, market innovation can
also take social forms, as in the Bottom-of-the-Pyramid strategies (targeting the poorest socioeconomic
groups in developing countries). For instance, Murphy et al. (2012) highlight how firms can invest in
social issues to prepare new market opportunities in emerging countries.

3.3 Information Asymmetry, Reputation and Greenwashing
As an increasing number of firms invest to appear as socially responsible, many of them are accused of
‘greenwashing’, defined as misleading consumers via selective disclosure of positive and withholding
of negative information about a company’s environmental or social performance (Lyon and Maxwell,
2011). As its regulation is extremely limited in USA (Delmas and Cuerel Burbano, 2011) and Europe,
greenwashing is often revealed by activists. Among the few exceptions is the legal conviction for deceptive
advertising of Monsanto in France in 2009 for its claim of the environmental virtues and biodegradability
of its herbicide ‘Round-Up’.
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B´enabou and Tirole (2006) show that if there is a lot to gain from CSR, doubt is thus created about the
true motive for which good deeds are performed (reputation-stealing effect). More specifically, Delmas
and Cuerel Burbano (2011) identify three main drivers of greenwashing: external (pressure from NGOs,
regulators, consumers, investors), organizational (incentives structure, ethical climate and communication
policy) and individual (narrow decision framing, hyperbolic discounting and optimistic bias).
Beyond case studies, empirical analyses of greenwashing are still limited and would be insightful.
Among the few existing studies, Kim and Lyon (2008) compare voluntary disclosures of reductions of
greenhouse gas emissions in the electric utility sector against actual emissions and demonstrate that, in
the aggregate, the programme had no effect on carbon intensity.
Yet, protecting the firm’s reputation is an important motive for CSR activities beyond greenwashing.
Consumers’ memory can indeed be long-lasting. CSR may hence serve to signal the characteristics of
a good when quality is difficult to observe (Fisman et al., 2006). Analyzing natural experiments on
eBay where sellers offer identical products with and without charity donations, Elfenbein et al. (2012)
observe from about 150,000 auctions that, in the presence of little information about the reliability of
a seller, charity commitments play a significant role in establishing trust. Reputation, true CSR and
green advertising are hence not necessarily incompatible. In the same line, Brown et al. (2006) find
that firms that advertise more intensively also give more to charity. Hines and Ames (2000) report that
68% of interviewed consumers claimed to have bought a product or service because of a firm’s CSR
reputation. Similarly, CSR has been shown to contribute to increase the firm’s goodwill stock through
various channels (market, labour, cost of capital), with potential important impacts on profits (Kristr¨om
and Lundgren, 2003; Lundgren, 2003, 2011). CSR thus appears as a tool to build up firm reputation,
considered as a strategic intangible asset.
In sum, the evidence gathered suggests that CSR, reputation and image are compatible, even though it
remains core from a firm-level perspective to understand how CSR communication should be implemented
to avoid greenwashing, and from a regulator perspective, to grasp the extent and potential limitations of
this mechanism.

4. CSR as Delegated Responsibility in Imperfect Contracts
The third category of market imperfections driving CSR relies on contract incompleteness. The incomplete
contracting literature (Hart, 1995) considers that complete contingent contracts (for which all future events
affecting the contractual relationship are embedded into the initial contract) are not the rule, rather an
exception. Bounded rationality and imperfect information imply that contracts are inherently incomplete
thereby requiring to allocate discretionary power (and authority) to firm executives. Hence, by letting
executives exercise their discretion in a way favouring the interests of stakeholders other than shareholders,
CSR strategies may be an efficient tool of incomplete contracts. In fact, were managerial discretion
always exercised in favour of one particular party (e.g. shareholders or the executives themselves), other
stakeholders would be unwilling to do business with the firm. An agency problem in turn arises and needs
to be controlled for as CSR activities may be undertaken by managers expecting private benefits from it.
In this case, CSR strategies are driven by incentives in the firm’s agency relationship with its stakeholders,
based on internal (delegated or organizational) pressure from shareholders, employees and directors.

4.1 CSR as Delegated Responsibility of Shareholders
Shareholders hold a major stand with full legitimacy to ask, in addition to fiduciary duties, the firm they
own to engage in CSR. For instance, Gollier and Pouget (2012) describe how the US$48 billion buyout of
the giant Dallas energy company TXU in 2007 by Texas Pacific Group, Kohlbert Kravis Roberts & Co.
and the Private Equity arm of Goldman Sachs included an agreement to significantly scale back TXU’s
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coal plant building plan and to adhere to a strict set of environmental standards. Research on CSR and
shareholders essentially belongs to the wide and expanding management and finance literature on socially
responsible investments (SRI).
In the USA or in Europe, up to 1 dollar out of 9 would currently incorporate a socially responsible
dimension, that is, it considers not only financial performance but also nonfinancial performance criteria
in the investment decision process (Crifo and Mottis, 2013). The evolution of SRI markets is therefore an
important issue for CSR decisions (Scholtens, 2006). Dam and Scholtens (2013) further demonstrate that
ownership types matter for CSR policies and the relative value put upon CSR can differ along different
types of owners. Some institutional investors may have an explicit SRI policy either imposed (as, for
instance, for the French pension trust fund described in Crifo and Mottis, 2013), or because of fiduciary
duty or independent social and environmental obligations (see Sandberg, 2013).
Chatterji et al. (2009) distinguish four motivations of social investors: financial (believing that CSR
increases firm performance), deontological (not willing to profit from unethical or heinous actions),
consequentialist (rewarding good behaviour and providing incentive) and expressive (expressing personal
identity to yourself or others). Delegated responsibility covers essentially those last three points. Investors
are also highly aware of regulatory context and opportunities, as illustrated in Takeda and Tomozawa
(2008)’ investigation of stock price reactions to the release of environmental management ranking (issued
by a Nikkei newspaper) in Japan from 1998 to 2005. Their results indicate that market reactions were
changed between 2001 and 2002, when the Japanese government showed its strong commitment to
environmental policies.
To evaluate CSR strategies, investors usually rely on sustainability and ethical indices (see Hoti et al.,
2007). From a theoretical perspective, the impact of responsible investors on CSR strategies relates to the
abundant literature on the links between financial performance and CSR that will be detailed in section 5.
In view of those studies, essentially focused on the financial performance of SRI, SRI appears as an
increasing and effective lever which can penalize firms with insufficient CSR, at least without harming
investors’ profitability, likely improving it on the long run. Whereas most of the literature focuses on
stock investments, an expanding body of work started exploring responsible investments in different asset
classes, such as real estate (Eichholtz et al., 2010) or venture capital (Crifo and Forget, 2013).

4.2 CSR as Delegated Responsibility of Employees
The second category of firm stakeholders whose responsibility can be delegated through CSR is the labour
force, whose role is yet not as well understood as the role of shareholders.
As a starting point, CSR can appear as a signal for corporate culture and can thus contribute to shaping
workers’ identity and incentives (Akerlof and Kranton, 2005). Brekke and Nyborg (2008) show that
‘green’ firms can recruit motivated employees with team work values and hereby secure firm survival and
long-term performance. In a widely quoted work, Turban and Greening (1997) also propose that CSR can
attract good, or at least highly qualified employees (Albinger and Freeman, 2000; Backhaus et al., 2002).
High level of CSR can also reduce costly employee turnover (Portney, 2008). Motivated employees might
also be likely to accept lower wages than the fair market value because they are compensated through the
knowledge that their work satisfies their personal values (Frank, 1996). Recent empirical work on French
data reveals that the employees of firms that have adopted environmental standards (ISO 14001) report
a higher feeling of usefulness in their job and describe themselves as fairly valued compared to other
workers (Lanfranchi and Pekovic, 2011).
Proactive human resources policy in itself appears to increase firm performance through productivity
(see Jones and Murrell, 2001; Galbreath, 2006; Edmans, 2011; Delmas and Pekovic, 2013). Analyses of
the interaction of the different dimensions of CSR strategies also find a positive link between responsible
practices towards employees and financial performance (Barnett and Salomon, 2006), in particular when
they are combined with responsible practices towards customers and suppliers (Cavaco and Crifo, 2013).
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In sum, while socially responsible investment appears as an effective tool to penalize firms for
insufficient CSR, proactive CSR can enhance employee productivity through various paths. Both are
linked to what investors and potential future employees believe the firm’s true CSR level is.

4.3 CSR as the Delegated Responsibility of Directors
The literature that analyses CSR as the delegated responsibility of directors is essentially anchored in
agency theory. The purpose of corporate governance is to organize the relationships and responsibilities
to guarantee shareholders that the firms they invest in are managed in compliance with their own interest,
especially for publicly traded firms. Such rules are generally organized within a three-layer structure:
shareholders, who meet in general assemblies and delegate their control to a board of directors (or
supervisory board), which monitors CEOs’ operational decisions. Directors may hence delegate CSR to
CEOs (i.e. let them exercise their discretion in a way favouring the interests of stakeholders other than
shareholders) as a discretionary power tool necessary to deal with contract incompleteness.
Let us first consider the specific case of CEOs-owners. Founding and owning CEOs have all power to
choose their firm’s CSR level in line with their business model and personal objectives. Many examples of
such CEOs who develop strong CSR strategies are given in the literature, such as Frank Riboud, founder
of the food company Danone. Nevertheless, putting aside the large population of small- and medium-size
enterprises, firms are seldom both owned and managed by the same people.
When CEOs are neither owners nor backed up by philanthropic shareholders, according to Friedman
(1970), their responsibility is then to ensure profitability. If CEOs embark firms on CSR, they might
misappropriate shareholders’ funds for opportunistic reasons. Anchored in the agency theory, such a CSR
could thus be a perquisite for managers who like the accolades of the advocates of broadened social
performance (Baron et al., 2008). Bringing the argument a step forward, Cespa and Cestone (2007) build
an entrenchment theory portraying CSR strategies as a way for inefficient managers to ensure stakeholders’
support to reinforce their own position at the expense of shareholders. Their findings provide a rationale
for the emergence of specialized institutions (social auditors and ethic indexes) that help firms commit to
stakeholder protection even in the case of managerial replacement.
More generally and beyond agency theory, the board’s impact on CSR activities is attracting growing
interest. Brown et al. (2006), for instance, show that firms with larger boards of directors are associated
with significantly more cash giving and with the establishment of corporate foundations. Jo and Harjoto
(2011) highlight that engagement in CSR is positively associated with board independence and institutional
ownership. Using a neoinstitutional framework, Ntim and Soobaroyen (2013) go a step further and
highlight that better-governed corporations are more likely to be more socially responsible, with a
consequential positive effect on financial performance. A systematic analysis of the link between CSR
and corporate governance indicators (such as board composition) remains on the agenda of future research.

5. CSR and Performance
In previous sections, we identified and surveyed the major determinants of CSR, showing they were
anchored in market imperfections. Understanding these drivers is core to analyze why and how firms
would engage in CSR and how this engagement is likely to impact their activities. We now precisely focus
on this impact by surveying the large literature that investigates the link between CSR and firm financial
performance, before discussing research on the actual impact of CSR on nonfinancial performance.

5.1 CSR and Financial Performance
The link between CSR and firm financial performance has triggered considerable academic work, as
witnessed by the numerous surveys dedicated to this literature (e.g. Griffin and Mahon, 1997; Margolis
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and Walsh, 2003; Orlitzky et al., 2003; Portney, 2008; Scholtens, 2008; Van Beurden and G¨ossling, 2008;
Blanco et al., 2009). The debate on whether CSR leads to increased financial performance or not can
be somewhat considered as closed by the extensive meta-analysis conducted by Margolis et al. (2009)
on 251 studies. The authors conclude that ‘the effect of corporate social performance on corporate
financial performance is small, positive and significant. Corporate social performance does not destroy
shareholder value, even if its effect on the value is not large’.
Yet, many scholars consider that research is still needed to understand how firms can be successful on
both financial and social levels (Horv´athov´a, 2010; Surroca et al., 2010). As a primer, further research on
CSR and financial performance should avoid numerous biases and problems that have been pointed out
in the literature, among which: omitted variables in the determinants of profitability (McWilliams and
Siegel, 2000); model misspecification and endogeneity (Garcia-Castro et al., 2010); limited data (small
samples, old periods; Horv´athov´a, 2010); cross-sectional analysis invalid in the presence of significant
firm heterogeneity (Elsayed and Paton, 2005) and linearity assumptions (Barnett and Salomon, 2006).
Moreover, the economic framework we present in Figure 1 and previous sections highlights that CSR in
fact covers different types of private strategies, depending on market imperfections and social preferences.
So far, little work clearly anchors the empirical test of the CSR – financial performance relationship into
theoretical mechanisms, while our analysis highlighted strong ground to do so. For instance, Iwata
and Okada (2011) consider the effect of two different environmental issues (waste and greenhouse gas
emissions) on financial performance using panel data on Japanese manufacturing firms and show that
the responses of financial performance are different depending on each environmental issue. Similarly,
analyses using accounting ratios or market-based data to grasp financial performance often yield different
results (Margolis and Walsh, 2003). We consider each set of data likely relates to a different mechanism
that will differently impact firm performance, and whose identification might be eased by our framework
and could explain results observed.
Another related important research path lies in the direction and mechanisms of causation. Whether
CSR would lead (or not) to superior firm financial performance, or whether financial performance would
rather be a necessary condition for CSR is a major stake to investigate (see Margolis et al., 2009). For
instance, Wagner (2010) uses panel data to disentangle the effects of CSR, advertising and R&D over
time. Baron et al. (2008) find that responsive corporate social performance increases with slack resources.
In the same line, Nelling and Webb (2009)’s in-depth study based on time series and focused on causality
shows that the causality goes from stock market performance to higher investments in aspects of CSR
devoted to employee relations; but CSR activities do not affect financial performance. However, more
recently, Deng et al. (2013) use a large sample of mergers in the USA and find clear evidence that the
CSR level of firm acquirers is an important determinant of merger performance and completion. Whereas
increasing evidence points out that profits drive CSR, the causality seems once again to depend on the
mechanism that underpins the relationship, and which should be the focus of further studies in this field.
The impact of CSR on financial performance should also be reflected upon at an international scale.
Indeed, most of the literature focused on CSR in the USA and Europe. Kitzmueller and Shimshack
(2012) gathered the existing evidence on the potential importance and development of CSR in transitional
economies. As social preferences and market imperfections are likely to strongly differ between countries,
further analysis of international CSR, particularly in emerging countries, would enable insightful tests
of the mechanisms driving CSR and its impact on financial performance. A complementary research
path consists in investigating how multinationals adapt their environmental and social activities to the
country they operate in, that is, how changes in a firm’s environment, markets and agency relationship
(see Figure 1) shape CSR and its profitability. In one of the most comprehensive study up-to-date, Surroca
et al. (2013) show that mounting stakeholder pressure in a multinational’s home country leads the firm to
transfer its socially irresponsible activities to its overseas subsidiaries. The authors put forward the role
of institutional environment (market imperfection affecting regulation in our framework). The costs and
benefits of such strategies are still on the research agenda.
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5.2 CSR and Nonfinancial Performance
If CSR amounts to privately provided public goods, it is important to be able to evaluate its impact not only
on financial performance, but also on nonfinancial performance, measured by social and environmental
performance or social welfare. Lee (2008) and Abeysuriya et al. (2007) already called for more attention
to the social side of the equation.
Regarding market imperfections affecting regulation (see Figure 1), theoretical results on the impact
of CSR on social performance are mixed as CSR does not necessarily increase social welfare (Lyon and
Maxwell, 2008).
In terms of public politics, CSR can be a less costly substitute for government mandates and can hence
increase welfare, but it can also distort regulatory decisions in a way that lowers social welfare (Besley
and Ghatak, 2007). For Lyon and Maxwell (2008), overall, the impact of preemptive CSR depends upon
whether it is undertaken unilaterally or through a voluntary agreement with the regulator, and whether
the regulator is welfare-maximizing or influenced by a particular interest group.
In terms of private politics, it remains unclear whether social pressure from NGOs is beneficial for
society as negative externalities are reduced. Heyes and Maxwell (2004) compare the relative merits
of two types of self-regulation mechanisms: mandatory through an international organization setting
a constraining standard, and voluntary through an NGO operating labelling schemes. They show that
the level of industry resistance to the standard is greater when an NGO exists than when it does not.
In turn, though the anticipation of industry resistance leads the international organization to decrease
the stringency of its standard, the NGO may serve as a ‘back-stop’ function and may encourage
more stringent international standard. Moreover, the authors show that when both the voluntary and
mandatory schemes coexist, the existence of NGOs increases welfare. However, by inducing firms to
lobby against government standards, it is also possible that the existence of NGO labelling schemes
undermine government regulatory programmes that would be of even greater value (Lyon and Maxwell,
2008).
In terms of altruism, prosocial behaviours stemming from image concerns have been shown to imply
a positive externality. The image value ‘bought’ by a responsible firm increases the private individual
return of the firm and partly reduces the negative social externality costs to be corrected (B´enabou and
Tirole, 2006). Hence, CSR motivated by altruism or prosocial behaviours may partly substitute to publicly
provided public goods, thereby increasing social welfare.
Regarding CSR and market imperfections that affect competition (see Figure 1), studies remain scarce.
Intuitively, CSR certification might increase the sales of environmentally (e.g. recycled) or socially
(e.g. fair trade) friendly products, thereby increasing the utility of consumers who switch from conventional
to green products. If green products substitute to conventional ones, as on a mature market with stable
sales, social welfare might increase. However, if the market is expanding, the increasing overall sales
might generate social damage. One can think, for instance, of the debate generated by green products
whose global life-cycle analysis turned out to be more polluting than conventional products. Moreover,
Faucheux and Nicolai (1998) argue that state intervention is needed to avoid firm competition-driven
technological lock-ins. Applying the Coase theorem and thus bringing transaction costs and property
rights to fore, Cerin (2006) also highlights that strong public support is necessary to create private
incentives for exploring significant economic and environmental win-win innovations.
Empirical tests of these theoretical predictions still lack in the CSR literature, at least from the economics
and management science perspectives, and should be developed. An interesting example is Brouhle et al.
(2009)’s evaluation of two environmental policy levers (a voluntary programme and the threat of formal
regulation) on emissions in the metal-finishing industry. They find that participation in the voluntary
programme yielded little, if any, additional reductions in emissions. However, while participants do not
appear to take advantage of the programme initially, they make greater strides in reducing emissions than
nonparticipants in later years.
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As for financial performance, research on CSR nonfinancial performance would strongly benefit from
international studies. Dam and Scholtens (2008) hence use international data to demonstrate that firms
with high level of CSR are less likely to relocalize their production in countries with weak environmental
regulation (the pollution heaven hypothesis). Dam and Scholtens (2012) go further and highlight that
the quality of institutions (imperfections affecting regulation in our framework) drives multinational
environmental behaviour (both pollution haven and resource curse).
However, studies seldom simultaneously tackle both the environmental and social impacts of CSR.
From this perspective, the toolbox to evaluate CSR impact on social welfare could likely benefit from
the experience gathered in other research fields. For instance, lessons from public policy analysis and
development economics might be drawn and transferred to analyze the respective impact of various CSR
policies on public welfare. Methodologies such as impact evaluation methods relying on experimental
and quasi-experimental designs could also be insightful.

6. Concluding Remarks
This paper proposed a comprehensive framework to analyze the economic determinants of CSR from
a firm-level perspective, giving coherency to a broad and expanding literature. We surveyed how CSR
is driven by market imperfections, namely the existence of externalities, public goods and altruism,
imperfect competition and contract incompleteness.
Beyond the future research paths that were suggested in each section, our analysis of the literature
sheds light on two crucial gaps which warrant further academic attention. First, a disconnection appears
between the analysis of CSR drivers (identified in Figure 1) and CSR impacts, the latter most often
lacking anchorage in the former. We highlighted market imperfections driving distinct incentives for
firms to engage in CSR and thus various CSR activities, but the respective consequences of corporate
policies are seldom disentangled. At a microscale, long-term empirical studies at the industry level might
yield relevant data to succeed to do so. At a more macrolevel, a new research avenue is also triggered by
the issues raised by the worldwide expansion of CSR, particularly under the impulse of multinationals.
The second gap identified lies in the imbalanced evaluation of the financial and social impacts of CSR.
While extensive work has been conducted on CSR financial performance, further analyses of the social
consequences of CSR are needed, as they have been most often set aside. A lack of relevant data likely
grounds this literature orientation. New methodologies drawn from development economics and field
experimental economics might thus usefully contribute to such future research.

Acknowledgements
We would like to thank Bernard Sinclair-Desgagn´e, S´ebastien Pouget, Eric Giraud-H´eraud, Gunther CapelleBlancard, participants at the CSR and Environment seminar at Ecole Polytechnique and the three anonymous
referees for their comments on earlier drafts of this paper. We remain responsible for all residual errors or
omissions. The support of the Chair for Sustainable Finance and Responsible Investment (TSE-IDEI and Ecole
Polytechnique) is gratefully acknowledged.

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