Reaction making impact
— Rush, “Chemistry,” Signals (1982).
Corporate social responsibility (CSR) is the new sexy thing in the philanthropy and humanitarian fundraising worlds. “Doing well while doing good” is the buzz phrase, and I admit — it’s got a nice, maybe even sensible ring to it. On the other hand, like many humanitarian practitioners I know, I come to the CSR conversation with a healthy dose of cynicism and skepticism. I’ve seen it be really lame a lot of the time, and I’ve seen it go really bad a few times. But the ship has also very obviously sailed. Corporate social responsibility is here to stay. It’s part of the global humanitarian context, for better and/or for worse. As humanitarian relief and development professionals we have to deal with CSR. Here’s where you come in. What do you think?
As an applied economist — more specifically as an applied economist who has done a good amount of work on applied contract theory — whenever I hear about CSR, I think about signalling, which Wikipedia describes as
The idea that one party (termed the agent) credibly conveys some information about itself to another party (the principal). For example, in Michael Spence’s job-market signalling model, (potential) employees send a signal about their ability level to the employer by acquiring certain education credentials. The informational value of the credential comes from the fact that the employer assumes it is positively correlated with having greater ability.
Not only that — the agent also has to incur a real cost in order to send the signal, otherwise the signal is simply not credible. Moreover, sending the signal need not involve any productive aim other than signaling.
For example, many people view getting an MBA degree as signalling, since it is very costly to get an MBA (both in terms of time and tuition money), and it is not immediately obvious that the knowledge acquired in business school is immediately useful in business or cannot be acquired with experience.
Back to CSR
So how about CSR? It is definitely costly for firms to be socially responsible. For example, the Wikipedia entry on CSR discusses how a given firm procures Fair Trade coffee and tea, because “Fairtrade fits very strongly into [their] commitment to [their] communities.”
To me, it’s all marketing. If a firm adopts some CSR practice, there is a real cost to it. But once that cost is incurred, it’s pretty much all upside. A CSR practice does not turn any potential client off from buying from the firm, nor does it turn any potential employee off from working for the firm, but it may attract potential clients and quality potential employees for whom it is important that the firm they buy from or work for adopt CSR practices.
Again, there is a cost to adopting a given CSR practice. If there is no cost to some practice, it is presumably not worthwhile. But in cases where that cost is offset by the expected benefits just discussed, the firm will adopt the CSR practice. Alternatively, in cases where that cost exceeds the expected benefits, the firm does not adopt the CSR practice. Like any rational decision, this one is taken at the margin: if “good for the community” means “good for the bottom line,” why would a firm willingly leave dollar bills on the sidewalk?
“But At Least We’re Doing Something!”
Some will say “Maybe it is marketing, but at least CSR firms are doing something to help the community.”
So again: Really?
It is difficult to know whether something actually “works” (in the sense of increasing recipient welfare) in the best-case scenario wherein one can afford to run a randomized controlled trial to evaluate the statement. So who’s to say that a CSR firm actually knows whether it has really increased welfare? The truth is that it does not and, in most cases, cannot afford the luxury to find out.
In short, color me cynical — you certainly wouldn’t be the first to do so — but I really think a lot of it is all just marketing. I hope some of you disagree with me and contradict me in the comments; as in many other instances, I would be very happy to be convinced that I am wrong.