Effect of Consumer Awareness on Corporate Social Responsibility under Asymmetric Information

35 Pages Posted: 20 Sep 2017

See all articles by Xiaomeng Guo

Xiaomeng Guo

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Guang Xiao

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School

Date Written: September 19, 2017

Abstract

This paper studies the interaction between a firm and consumers under the consideration of corporate social responsibility. The firm can be either socially responsible or socially irresponsible; however, the consumers cannot observe the firm’s exact type, which is private information. The firm can try to signal its type through pricing and other information sharing mechanisms (e.g., issue sustainability reports and obtain third-party certifications). We find that due to the existence of asymmetric information, increasing consumer awareness of corporate social responsibility does not necessarily help promote responsible corporate behaviors. Specifically, when a larger fraction of consumers become socially concerned or when the consumers have stronger willingness to reward (punish) the responsible (irresponsible) firm, the responsible firm could be worse off whereas the irresponsible firm could be better off. This is because the seemingly attractive trend in consumer behavior will affect the responsible firm’s signaling cost as well as its equilibrium strategy (separating vs. pooling). In addition, we find that improving the signaling accuracy will always benefit the responsible firm but may or may not hurt the irresponsible firm. Our results suggest that addressing the information asymmetry issue is the key in promoting corporate social responsibility. In particular, concerned parties should first exert efforts to create transparency in firms’ sustainability practices before making investments to educate consumers and influence their purchasing behaviors.

Keywords: Corporate Social Responsibility, Consumer Behavior, Information Asymmetry, Signaling

Suggested Citation

Guo, Xiaomeng and Xiao, Guang and Zhang, Fuqiang, Effect of Consumer Awareness on Corporate Social Responsibility under Asymmetric Information (September 19, 2017). Available at SSRN: https://ssrn.com/abstract=3039862 or http://dx.doi.org/10.2139/ssrn.3039862

Xiaomeng Guo (Contact Author)

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies

M624, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon M923
China

Guang Xiao

Hong Kong Polytechnic University - Department of Logistics and Maritime Studies ( email )

M634, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hong Kong, Hung Hom, Kowloon
China

HOME PAGE: http://xiaog.weebly.com/

Fuqiang Zhang

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

HOME PAGE: http://www.olin.wustl.edu/faculty/zhang/

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