33 Pages Posted: 3 Dec 2005
Date Written: October 2005
Milton Friedman argued that the social responsibility of firms is to maximize profits. This paper examines this argument for the economic environment envisioned by Friedman in which citizens can personally give to social causes and can invest in profit-maximizing firms and firms that give a portion of their profits to social causes. Citizens obtain social satisfaction from corporate social giving, but that giving may not be a perfect substitute for personal giving. The paper presents a theory of corporate social responsibility (CSR) and shows that CSR is costly when it is an imperfect substitute, but entrepreneurs and not shareholders bear that cost. A social entrepreneur forms a CSR firm at a financial loss because either doing so expands the opportunity sets of citizens in consumption-social giving space or there is an entrepreneurial social glow from forming the firm. The creation of CSR firms increases aggregate social giving. Firms can also undertake strategic CSR activities that increase profits, and a social entrepreneur carries strategic CSR beyond profit maximization and market value maximization. The paper also examines the implications of taxes and the effect of the market for control for the sustainability of CSR.
Keywords: economics of organizations, corporate governance
JEL Classification: M14, M13, D21
Suggested Citation: Suggested Citation