An Employment Model of Social Enterprises and the Effects of Government Subsidy

Abstract

We consider an employment model of social enterprises which maximize the weighted average of profit and social value generated by employing disadvantaged workers. The social value consists of the direct welfare improvement of the disadvantaged employees and the positive ripple effect so generated. In the Cournot oligopoly model, we show that social enterprises can contribute to improving social welfare (the sum of the standard social surplus and the social value). We propose a subsidy scheme for social enterprises, the subsidy amount of which is proportional to the social performance (measured by social value). We show that the subsidy can play a positive role in providing incentives for social enterprises to produce more social values and in enhancing social welfare. Finally, we provide an empirical analysis on the effects of the government subsidy on economic and social performances of social enterprises using the case of Korea during 2014-2017. We use the voluntary disclosure data of social enterprises certified by Korean Government. Only the subsidy for social insurance fees has a positive effect on the social performance while the subsidy for personnel expenses, the major part of the government expenditure, has neither positive nor negative effect. On the other hand, subsidies for personnel expenses and social insurance fees have positive effects on net income. Our results suggest a proposal for redesigning the current subsidy scheme in order to improve its effectiveness.