Sustainability Reporting out of a Prisoner's Dilemma

11 Pages Posted: 29 Jan 2012 Last revised: 2 Jun 2014

Date Written: January 27, 2012

Abstract

Listed firms increasingly strive for a sustainable appearance, which has made sustainability reporting very popular in recent years. This would be completely rational if sustainability reporting could enhance shareholder value. This paper investigates from a theoretical perspective which conditions are sufficient for the individual and collective rationality of sustainability reporting. The analysis leads to the conclusion that, due to the competition between firms, sustainability reporting generates a separation equilibrium as long as the reporting costs are proportional to the reported level and the marginal costs of reporting differ with the true level of sustainability. Although it might be preferable, a pooling equilibrium with no sustainability reporting cannot be sustained, which is a result of the so-called prisoner's dilemma that firms find themselves caught within. The most important practical implication of the model is a call for external auditing with high assurance levels to ensure an efficient separation of highly and weakly sustainable firms.

Keywords: Sustainability Reporting, Game Theory, Signaling Theory, Prisoner’s Dilemma

JEL Classification: D52, D53, D82, M14, M49

Suggested Citation

Kaspereit, Thomas, Sustainability Reporting out of a Prisoner's Dilemma (January 27, 2012). Available at SSRN: https://ssrn.com/abstract=1993018 or http://dx.doi.org/10.2139/ssrn.1993018

Thomas Kaspereit (Contact Author)

Universite du Luxembourg ( email )

Université du Luxembourg
Campus Kirchberg
Luxembourg, 1359
Luxembourg
+352 466644 6728 (Phone)

HOME PAGE: http://https://wwwen.uni.lu/research/fdef/dem/people/thomas_kaspereit

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