Heterogeneous Firms and Corporate Social Responsibility: An Analysis in Times of Crisis

Abstract

We set out a model that considers the concept of strategic CSR, and focuses on the role of consumers’ demand for CSR products, according to the so called “bottom up pressure”, that is consumers’ initiative in appreciating CSR. We enrich the above approach with the idea that CSR is a specific feature of goods improving their “quality”. In this way, we are able to consider it as a novel type of product differentiation based on the adoption of socially and environmentally responsible practices; as a consequence, our model builds on the literature based on heterogeneous firms in monopolistic competition (starting from the recent “new-new” trade theory pioneered by Melitz, 2003), that incorporates quality product differentiation. In a closed economy with CSR option in production, we analyze the link between heterogeneity in productivity and CSR intensity, by letting the optimal level of ethical standards to be endogenously determined by each firm. We then consider the need for external financing, finding that the latter may lead intra-marginal firms to exit production, as well as to a reduction in the optimal level of CSR of surviving firms. The latter outcome is especially relevant for the study of the relation between CSR and economic crisis. We identify some negative effects: a decline in consumers’ income has a negative impact on the demand of higher CSR intensity goods, whereas a tightening in external financing conditions leads to a decrease in the optimal level of CSR. On the other hand, external investors may attribute a positive value to the CSR effort of firms, as the latter may be seen as a positive reputational signal. We take into account that creditors attribute a specific weight to CSR activities in judging corporate attention for stakeholders, by assuming that firms’ exogenous probability of enforcing the financial contract is deemed to be higher when investors care about firms’ ethical efforts; at the same time, the share of tangible assets CSR firms are required to vow as collateral is assumed to be lower. We thus study the conditions which may make the reputational effect to mitigate the impact of the crisis on firms’ optimal level of CSR.