When Is Social Responsibility Socially Desirable?

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Abstract

We study a model in which corporate social responsibility arises in response to inefficient regulation. In our model, firms, governments, and workers interact. Firms create negative spillovers that can be attenuated through government regulation, which is set endogenously and may not be socially optimal. Companies can hire socially responsible employees who enjoy correcting spillovers. Because firms can capture rents created by allowing this, they sometimes find it optimal to lobby for inefficient rules and then encourage socially responsible behavior in their midst. Thus, social responsibility can either increase or decrease social welfare, depending on the costs of political capture.

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