When and how is corporate social responsibility profitable?

Abstract

Firms in various markets such as health care, financial services, software, consumer goods, etc. spend a significant amount of money on corporate social responsibility (CSR) activities. The literature suggests that consumers take into consideration firms' CSR activities when making purchase decisions, noting that and doing so either increases their purchase intention or makes them willing to pay higher prices for the firms' products and services.Unfortunately, notwithstanding its strategic benefits, the empirical findings regarding the impact of CSR on firms' financials are mixed. In this paper we explore when and why investing in CSR can have positive or negative impact on a firm's profitability. In doing so, we model two types of CSR (i.e., company ability relevant CSR (CSR-CA) and company ability irrelevant CSR (CSR-NCA)). We allow firms to choose which one to pursue if they decide to invest in CSR, and we incorporate the indirect effect of CSR through expectancy disconfirmation on consumers' utility, which has been ignored by the extant literature. Our analysis reveals the conditions under which it is optimal to invest in CSR and of what type. Then, we extend our analysis by investigating how the increase in consumers' appreciation of CSR and increase in consumers' sensitivity to evaluative context affect firms' optimal CSR strategies.