Corporate Social Responsibility as a Remedy for Moral Hazard?

Abstract

This study examines whether corporate social responsibility (CSR) acts as a remedy for moral hazard in the workplace. To obtain exogenous variation in employees’ propensity to engage in moral hazard, we exploit a natural experiment provided by large increases in state-level unemployment insurance (UI) benefits between 1992 and 2012 in the U.S. Higher UI benefits render the threat of termination less effective and hence increase employees’ incentives to shirk. Using a difference-in-differences methodology, we find that companies react to increases in UI benefits by increasing their engagement in employee-related CSR. This finding supports the view that CSR is a valuable resource that allows companies to motivate their employees against engaging in moral hazard. We further provide evidence that the increase in CSR is larger for companies operating in industries that are more labor intensive, more competitive, and subject to higher levels of stakeholder dissatisfaction.