Effect of Consumer Awareness on Corporate Social Responsibility under Asymmetric Information

Abstract

This paper studies the interaction between a firm and consumers under the consideration of corporate social responsibility. The firm can be either socially responsible or socially irresponsible; however, the consumers cannot observe the firm’s exact type, which is private information. The firm can try to signal its type through pricing and other information sharing mechanisms (e.g., issue sustainability reports and obtain third-party certifications). We find that due to the existence of asymmetric information, increasing consumer awareness of corporate social responsibility does not necessarily help promote responsible corporate behaviors. Specifically, when a larger fraction of consumers become socially concerned or when the consumers have stronger willingness to reward (punish) the responsible (irresponsible) firm, the responsible firm could be worse off whereas the irresponsible firm could be better off. This is because the seemingly attractive trend in consumer behavior will affect the responsible firm’s signaling cost as well as its equilibrium strategy (separating vs. pooling). In addition, we find that improving the signaling accuracy will always benefit the responsible firm but may or may not hurt the irresponsible firm. Our results suggest that addressing the information asymmetry issue is the key in promoting corporate social responsibility. In particular, concerned parties should first exert efforts to create transparency in firms’ sustainability practices before making investments to educate consumers and influence their purchasing behaviors.