The Economics of "Private Politics": Corporate Social Responsibility

Increasingly, private corporations engage in “private politics”, or “corporate social responsibility” (CSR). In some cases, such as the infamous Enron affair, huge discrepancies between stated and actual policies have been revealed, while in others corporations seem to have been taken hostage by interest groups, even if stated and actual polices matched. The paper attempts to model the “private politics” of CSR in economic terms. On the one hand, it is assumed that corporations can generate economic rent by favourable responses from policy makers, regulators and consumers to building a CSR image. Building an image is, however, costly. On the other hand, the rent might be subject to rent-seeking activities from pressure groups, labour (in the form of “rent sharing”) etc. The resulting game is modelled as a Stackleberg rent-seeking game. A corporation is assumed to be able to deter attacks on its CSR rent by direct investments in deterrence (public policy, advertising etc.) and by backing up its CSR image by actual policies. Both of these are costly, too. The model illustrates the effect on CSR of risk aversion and of comparative advantages in implementing CSR policies as well as in creating defending “image rents”. CSR activities might also result from principal-agent problems between owners and management.