Eliciting Altruistic Responses by Incentivizing Strategic Choices: Implications for CSR Policy-making

Abstract

In this thesis, we explore various facets of Corporate Social Responsibility (CSR) spending by firms. CSR regulation in India is governed by the Companies Act, 2013(‘Act’). Schedule VII of the ‘Act’ specifies the activities that qualify for CSR. As part of CSR spending, firms spend money on a variety of sectors- we classify this spending as strategic and altrusitic and develop a game-theoretic model of CSR spending by firms who produce di↵erent qualities of products as well as their pricing strategies. We address the following questions. First, what are the equilibrium outcomes when strategic CSR is not recognized and firms are allowed to undertake only altruistic CSR spending. Second, does allowing for strategic CSR lower the incentives for firms to undertake altruistic CSR spending? Surprisingly, we find that in contrast to the common perception that strategic and altruistic CSR spending are substitutes, allowing firms to undertake strategic CSR spending increases their altruistic CSR spending as well. In addition, profits as well as consumer surplus and hence social welfare increase. Next, we consider the situation where a regulator asks firms to spend a certain amount for CSR, similar to the ‘Act’ mandating firms to spend 2% of their profits on CSR. If a firm underspends (overspends) recommended CSR, it gets a penalty (reward). We find that the social welfare under regulation can be greater than or lower than under no regulation. Similarly, there are ranges of parameter values, where firms may be better o↵ under the regulation as opposed to the case of no regulation. Finally, we ask whether firms with a higher perceived value of CSR spending overspend or underspend on CSR. To answer this question, we use data on firms’ CSR expenditures to compute the perceived value or the k-value. A higher k-value signifies a higher tendency of a firm to overspend. We obtain k-value of around 6000 Indian firms and classify them into high, mid and low profit groups. Low-profit firms generally have a higher perception of CSR. High-profit firms, whether overspending or underspending, don’t have significant differences in their k-values.