Socially Responsible Firms and Endogenous Choice of Strategic Incentives

Abstract

In this paper we are analyzing a mixed quantity-setting duopoly consisting of a socially concerned firm and a profit maximizing firm. The socially concerned firm considers one group of stakeholders in its objective function and maximizes its profit plus a share of consumer surplus. Both firms have the option to hire a manager who determines the production quantity on behalf of the firm’s owner. We find that in the subgame-perfect equilibrium of this game both firms hire a manager and delegate the production choice. If the unit production costs of the firms are similar, then the socially concerned firm has a higher market share and even higher profit. Interestingly, we observe that as the share of consumer surplus taken into account by the socially concerned firm increases, also its profit might increase. The conclusion is that it pays off to take stakeholder interests into account, but not too much.

Keywords: Socially concerned firms, Corporate social responsibility, Strategic incentives, Mixed oligopoly

JEL Classification: D21, L13, L22, M14