Corporate Provision of Public Goods
Management Science (Articles in Advance): DOI: 10.1287/mnsc.2018.3137
17 Pages Posted: 5 Jun 2012 Last revised: 3 Apr 2019
Date Written: June 5, 2012
Friedman (1970) suggests that firms ought not divert profits towards public goods since shareholders can better make these contributions themselves. Despite this, activist shareholders are increasingly successful in persuading firms to be "socially responsible." We study firm behavior when shareholders care about public goods as well as profits and when managerial contracts reflect these concerns. Under these ideal conditions, managers redirect more profits toward public goods than shareholders would when acting separately---shareholders are poorer but happier. Further, so long as the public good is sufficiently desirable, the manager selects the socially optimal level of output, despite the mismatch between shareholder preferences and those of society at large.
Keywords: public goods, corporate social responsibility, externalities
JEL Classification: C7, D21, G3, H4, D62
Suggested Citation: Suggested Citation