A Rawlsian View of CSR and the Game Theory of its Implementation (III): Conformism, Equilibrium Refinement and Selection

EconomEtica Working Paper No. 24

43 Pages Posted: 6 Mar 2011

See all articles by Lorenzo Sacconi

Lorenzo Sacconi

University of Trento - Department of Economics and Management

Date Written: August 5, 2010

Abstract

This is the third part of a comprehensive essay on the Rawlsian view of corporate social responsibility (CSR) seen a multi-stakeholder fiduciary model of corporate governance (see part I). A game theoretical model of the interplay between the owner (who controls the firm) and all the remaining corporate stakeholders is provided in term of a repeated Trust (and reputation) Game. Although an ex ante social contract is able to justify the choice of a fair equilibrium (see part II), ex post we are faced with the problem of the incentives to which players will respond when they exit from the original-position-and-veil-of-ignorance thought experiment and return to ‘the game of life’, where they play according to the entire set of their preferences and motivations. The problem is that in the presence of multiple equilibria, each with some motivating force conditional on existence of a system of expectations consistent with it, no particular equilibria has definitive reason to be carried out, and thus the one corresponding to the ex ante fair agreement need not have any incentive effect on compliance.

In fact the obvious reputation equilibria chosen by the firm (were it able to do that) would not be the fully fair and cooperative one, but rather the one whereby the firm acquires a reputation for abusing the trust of its stakeholders (employees, customers, suppliers, investors, capital-lenders and local communities wherein it operates) – but only to the extent that makes them indifferent between maintaining their relations with the firm and withdrawing from them. There is some evidence of this behavior in real life relationships between companies and their stakeholders. An example is provided by companies that claim to be socially accountable because they publish a social report and announce a code of ethics, but nevertheless are not accurate in reporting all the relevant social and environmental impacts of their conduct on all the concerned stakeholders and comply in only few cases, or to a minimal extent, with the declared code.

However, there is also evidence of stakeholder activism that refuses to acquiesce and actively countervails such hypocritical corporate conduct. Examples are phenomena such as responsible consumerism, socially responsible finance, human rights advocacy through active participation in shareholders meetings, brand boycotts in the case of environmental disasters, allegations of human rights violations or discrimination against employees by companies (especially when operating plants relocated to developing countries). These behaviors express the stakeholders’ attachment to impersonal principles of justice, i.e. a desire to conform with socially accepted norms of fair treatment - even when such conformity concerns not so much the material payoff of the stakeholder itself but mostly an ideal component of his/her utility. How does the social contract approach account for these apparently ‘irrational’ and unselfish actions, given that acquiescence would be the stakeholder’s best response?

The main result of this paper is that a social contract on CSR principles helps reducing to just two the candidate reputation equilibria that ex post, in the real world interaction taking place beyond the “veil of ignorance”, may be played. These equilibria coincide with i) complete compliance with the social contract and ii) the stakeholders punishing of the firm incomplete compliance by staying out from the relation even when their material payoff would push them to give in to the firm sophisticated abuse. Sophisticated abuse repeated equilibria do not anymore belong to the equilibrium set. This is because equilibria are defined not as traditional Nash equilibria, but as psychological equilibria (see Geanakoplos, Pearce and Stacchetti, 1989; Rabin, 1993) developed according to the theory of conformist preferences (Grimalda and Sacconi, 2005). It is argued that the behavioral model of conformist preference is nothing more than the development of Rawls’ theory of the sense of justice, and hence is a constitutive part of a Rawlsian theory of CSR, able to include not just the theory of choice under veil of ignorance in the original position, but also the neglected theory of ex post social contract stability (Rawls, 1971; Sacconi and Faillo, 2010).

Keywords: Social Responsibility, Stakeholder, Preference,Trust Game, Justice

JEL Classification: C72, C79, D23, D63, D64, G30, M14

Suggested Citation

Sacconi, Lorenzo, A Rawlsian View of CSR and the Game Theory of its Implementation (III): Conformism, Equilibrium Refinement and Selection (August 5, 2010). EconomEtica Working Paper No. 24. Available at SSRN: https://ssrn.com/abstract=1778065 or http://dx.doi.org/10.2139/ssrn.1778065

Lorenzo Sacconi (Contact Author)

University of Trento - Department of Economics and Management ( email )

via Inama 5
I-38100 Trento
Italy

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