Adoption of Corporate Social Responsibility Under Asymmetric Information

This paper studies the interaction between a firm and its consumers under the consideration of corporate social responsibility (CSR). The firm can choose to be either socially responsible or irresponsible; however, the consumers cannot observe the firm's exact CSR type. The firm can signal its chosen CSR type through price and a third-party certification. We highlight the following main findings. First, due to the existence of asymmetric information, increasing consumer awareness of CSR may not necessarily benefit a firm with responsible behaviors. Specifically, as more consumers become socially concerned or as they 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. Second, if the CSR type can only be signaled through price alone, then being responsible is always less profitable and a profit-oriented firm has no incentive to adopt CSR. By contrast, combining price signal with a reasonably accurate certification could incentivize the profit-maximizing firm to engage in CSR when the fraction of socially responsible consumers in the market is high. Finally, we further study the impact of certification accuracy on the firm's profit and its social welfare implication. Our results suggest that addressing the information asymmetry issue is the key to aligning consumers' goodwill with firms' responsible behaviors. 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