Markets as Club-Goods Systems: The Role of Economic Reliance in Corporate Pro-Social Behavior

Abstract

When firms decide to engage in the provision of collective goods that benefit social welfare (i.e., to behave pro-socially), they may consider the strategic relevance of such goods for their own market operation. The bigger the stake of the firm in a given market, the greater its reliance on the market’s collective goods (e.g., communication networks, transportation infrastructure). Therefore, a market’s relative importance for a firm should be a significant predictor of corporate pro-social behavior. I test this argument by constructing a measure of corporate economic reliance on market systems based on the literature on club goods and analyzing data on corporations’ philanthropic responses to 3,115 natural disasters between 2003 and 2013, inclusive. I show that accounting for variation in economic reliance leads to a more accurate prediction of the frequency and magnitude of corporate pro-social behavior than widely invoked arguments rooted in the strategic considerations and social preferences literatures, which neglect such firm-market connection.