Bad Greenwashing, Good Greenwashing: Corporate Social Responsibility and Information Transparency
Yue Wu, Kaifu Zhang, and Jinhong Xie (2018)
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 perception and 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 by investing in observed CSR initiatives in order to pretend to be socially-minded, whereas a socially responsible firm can adopt an over-investment strategy on observed CSR activities to forestall such greenwashing attempt. We find that greater information transparency can have a negative effect on welfare because it introduces two social costs---higher transparency can eliminate a profit-driven firm's investment in CSR and incentivize a socially responsible firm to make excessive over-investment in observed CSR initiatives. We demonstrate that these two social costs are higher when consumer reward for CSR becomes larger. In addition, we examine the impacts of firms budget constraint and consumers' bargaining power---raising firms' budget or increasing consumers' bargaining power can both lead to an inferior social outcome.