Corporate Social Responsibility - An Economic and Financial Framework

Abstract:     
I propose an economically coherent analysis of corporate social responsibility (CSR), and suggest how it is reflected in financial markets. CSR is defined as a program of actions taken to reduce externalized costs or to avoid distributional conflicts. It is an institution that has evolved in response to market failures, a Coasian solution to some problems associated with social costs. The analysis suggests that there is a resource-allocation role for CSR programs in cases of market failure through private-social cost differentials, and also in cases where distributional disagreements are likely to be strong. In some sectors of the economy private and social costs are roughly in line and distributional debates are unusual: here corporate social responsibility has little role to play. Such sectors are outnumbered by those where CSR can play a valuable role in ensuring that the invisible hand acts, as intended, to produce the social good. It can also act to improve corporate profits and guard against reputational risks.

Number of Pages in PDF File: 33

Keywords: Corporate social responsibility, CSR, risk management, socially responsible investment, SRI, environmental responsibility

JEL Classification: D21, D61, M14

working papers series