Building Alliances for Corporate Social Responsibility

Abstract

Following the Dodd-Frank Act’s mandate that public companies disclose the use of conflict minerals in their products and processes, five well-known companies established an alliance and initiated a fund to audit mineral suppliers. Since contributing to a common fund has minimal direct benefits — audits are public and companies have equal access to certified suppliers regardless of contributions — companies have an incentive to free ride. Nevertheless, the initiative was successful: the alliance was established and dozens of other companies also contributed. We propose two factors that explain this success: the initial catalyst of an alliance and the status-seeking behavior of lower-status companies that subsequently contributed. To capture companies’ incentives to free-ride, we model the funding initiative as a public goods game and incorporate the two factors: (1) an invitation stage where some of the companies can form an alliance and make an initial contribution to the public good, and (2) status-seeking behavior, by which low-status firms want to be associated to high-status firms. We use the model to show how the combination of both factors leads to high contributions. We then conduct a laboratory experiment to test the effect of the two factors and how they interact. Our experiment shows that the invitation stage is key to high contributions. In particular, the formation of an alliance significantly increases group contribution. As our model predicts, we find evidence of status-seeking behavior which influences whether and how an alliance forms. Surprisingly, we find that high-status companies not in an alliance also contribute after the invitation stage. We attribute this unexpected result to higher moral responsibility for the high-status companies. Our findings demonstrate important insights for companies that seek to address industry-wide social responsibility problems.