A Portion of Profits to Charity: Corporate Social Responsibility and Firm Profitability

Abstract

I develop a model in which a firm can choose to donate a portion of its profits to the provision of a public good. Consumers value this public good and are willing to pay a price premium to a firm which makes such a donation. When this price premium is sufficiently large, the firm can raise its net profits by pledging a portion of those profits to provision of the public good. This is more likely when the consumer’s marginal valuation of contributions to the public good is high and when the firm (in the absence of donations) has a high ratio of fixed costs to operating profits. I identify some circumstances under which corporate social responsibility makes consumers worse off. I also analyze firm behavior when giving takes the form of a fixed dollar amount per unit sold. When giving takes this form, firms find it profitable to make a donation to the public good in a smaller range of circumstances compared to when giving is a fixed percentage of profits.

Keywords: Coporate Social Responsibility, Public Goods

JEL Classification: D4, D7, L2, H4