Too Good to be Nice: A Model of Corporate Social Responsibility Investment with Asymmetric Quality Information.

Abstract

High-quality firms sometimes under-invest in Corporate Social Responsibility (CSR) compared to lower quality firms. We show that information asymmetry in product quality could explain this behavior. Specifically, in a monopoly with information asymmetry, if only a small fraction of consumers is informed about the true quality of a product, a high-quality firm may distort its investment downwards and make a lower CSR investment than the one a low-quality firm would make. Ironically, this downward distortion works by burning quality, i.e., decreasing the value of the high-quality product, which makes imitation by the low-quality firm less appealing by reducing the demand for the high-quality firm, a mechanism that is novel and distinct from both money burning and counter-signaling.

Having established that CSR can have an informational role, we allow firms to engage in informative advertising. We find that, surprisingly, advertising will neither crowd out CSR nor inform all consumers. Instead, if the number of informed consumers is moderate, the high-quality firm will balance advertisement and CSR like substitutes, while it might treat them like complements when the number of informed consumers is low. We explore the boundaries of our results and find that they are robust to the assumptions about heterogeneity in consumers’ preferences, firms’ cost, or charity quality.

Keywords: Corporate Social Responsibility, Pricing, Information Asymmetry, Advertising

JEL Classification: M31