The Stakeholder Corporation and Social Welfare

Abstract

Abstract The stakeholder (or responsible) firm is defined in this paper as one that maximizes the (weighted or unweighted) sum of the surpluses of its customers and suppliers (including workers). We show that, although this objective is hard to empirically measure, it can be pursued by simple management rules that rely on constrained profit maximization. We find that unconstrained profit maximization gives a competitive edge to ordinary firms, but that stakeholder firms are better for social welfare and internalize several important effects of their activities on society. We also show that long term entry decisions should rely on profit modified by Pigouvian pricing of externalities, incidentally providing a novel justification for the polluter-pays principle.

Keywords: stakeholder, shareholder value, profit, Pigou tax

JEL Classification: D21, D40, D60, L21