Corporate Social Responsibility and the Allocation of Procurement Contracts: Evidence from a Natural Experiment

Abstract

This study examines whether corporate social responsibility (CSR) influences the allocation of government procurement contracts. To obtain exogenous variation in firms' social engagement, I exploit a quasi-natural experiment provided by the enactment of state-level constituency statutes, which allow directors to consider stakeholders' interests when making business decisions. Using constituency statutes as instrumental variable (IV) for CSR, I find that companies with higher CSR receive more procurement contracts. The effect is stronger for more complex contracts and in the early years of the government-company relationship, suggesting that CSR helps mitigate information asymmetries by signaling non-opportunistic behavior and trustworthiness. In addition, I find that the effect is stronger in competitive industries, indicating that CSR can serve as a differentiation strategy to compete against other bidders.