Bad Greenwashing, Good Greenwashing: Corporate Social Responsibility and Information Transparency
Yue Wu, Kaifu Zhang, and Jinhong Xie (2019)
With growing popularity of corporate social responsibility (CSR), critics point out that firms tend to focus on salient CSR activities while slacking off on the unobservable ones, using CSR as a marketing gimmick. Firms' emphasis on observable aspects and negligence of the unobservable aspects are often labeled as greenwashing. This paper develops a game-theoretic model of CSR investment, where consumers are socially minded but they can observe only a subset of CSR initiatives. Two types of firms are considered: those that are driven solely by profit maximization, and those that are socially responsible, motivated not only by profit but also by a genuine concern for the social good. Our analysis examines how information transparency affects a firm's strategies and the social welfare, and we identify both positive and negative aspects of greenwashing. First, low transparency incentivizes a profit-driven firm to engage in greenwashing through observable investment. Greenwashing prevents consumers from making informed purchase decisions but raises overall CSR spending. Second, sufficiently high transparency eliminates greenwashing and can motivate a socially responsible firm to make extra observable investment under the threat of greenwashing on the part of a profit-driven firm. However, when transparency further increases, this extra investment diminishes. In addition, our paper studies the impacts of firms' budget constraint and consumers' bargaining power: Raising the budget and increasing consumers' bargaining power can both lead to an inferior social outcome.