When is Greenwashing an Easy Fix?
32 Pages Posted: 17 Jun 2020 Last revised: 15 Sep 2020
Date Written: September 15, 2020
I construct a neoclassical model of investment for a firm that greenwashes its commitment to corporate social responsibility in exaggerating its minimization of using polluting inputs and maximizing its investment in social capital. I assume that greenwashing allows the firm some pricing power in its output market, but in tradeoff, it results in a dead weight loss due to the risk of being caught greenwashing that acts as a negative call option on the increased value of the firm. I find that there are limited circumstances where greenwashing pays off for the firm: when firm volatility is low, when the time till they expect to be caught is short, when interest rates are high and when their pricing power is high. As a result, without government intervention, the circumstances that favor greenwashing are very limited.
Keywords: Greenwashing, Corporate Social responsibility, firm value
JEL Classification: G1
Suggested Citation: Suggested Citation