Bad Greenwashing, Good Greenwashing: Corporate Social Responsibility and Information Transparency
Yue Wu, Kaifu Zhang, and Jinhong Xie (2017)
With the growing popularity of corporate social responsibility (CSR), critics point out that firms tend to focus on salient CSR projects while slacking off on the unobservable ones, using CSR as a marketing gimmick. This paper develops a game theoretical model of CSR investment. Only a subset of CSR initiatives can be observed by consumers, who reward CSR based on their inferences about firms' motives. Two types of firms are considered: those purely driven by profit maximization, and those who are socially responsible, motivated by not only profit but also genuine concerns for the social good. Our analysis reveals that a profit-driven firm can engage in greenwashing to pretend to be socially-minded whereas a socially responsible firm can adopt an over-investment strategy to forestall such greenwashing intent. Both greenwashing and over-investment can lead to lower or higher welfare than the full-information benchmark. We find that greater information transparency, larger consumer reward, stronger firm motivation for the social good, and higher likelihood of seeing a socially responsible firm can all have a negative impact on welfare. In addition, in presence of voluntary information disclosure or budget constraint, reducing the revelation cost or relaxing the budget constraint can lead to an inferior social outcome.