Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Corporate Social Responsibility or Voluntary Agreement? Pierre Fleckinger (Universit´e Paris 1) Matthieu Glachant (Mines ParisTech)
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
1/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Overview The pervasive question : Does Corporate Social Responsibility (CSR) really improve welfare ? This paper : Looks at CSR in relation to regulatory practices Studies the preemption motives behind CSR by means of : Introduction of endogenous regulatory effort Game-theoretic analysis of the policy cycle
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
2/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Regulation, VA and CSR Legislation traditional public intervention (norms, quotas, taxes...) initiated by the legislative body to correct some externality or curb bad practices. Voluntary Agreements increasingly popular in the past two decades. Public Voluntary Programs (US) Negotiated agreements (Europe and Asia)
Commitment jointly designed with the regulator. Corporate Social Responsibility firms unilaterally commits to better practices, communicate and invest A relatively new trend (early 00’s)–much ado about nothing ? P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
3/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
This is not about window-dressing or green-washing...
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
4/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Related Literature I Yesterday, today
1
Command-and-control
2
Pigovian tradition
3
A consistent body of literature on VA, starting with Segerson & Miceli (1998) Existence and Pareto-optimality Negotiation under a regulatory threat Theoretical advantage of VA : economizes on transaction costs and allows flexible implementation
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
5/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Related Literature II Tomorrow : Corporate Social Responsibility ? 1
Market motivation : firms try to attract green consumers : Arora and Gangopadhyay (1995) shareholders : Besley and Ghatak (2007) motivated employees Brekke and Nyborg (2004) consequences studied by Baron in a series of papers (2003-2008)
2
Shaping and preempting future policies to obtain competitive advantage through legislation : Lutz et al. (2000), Denicolo (2000) lobbying game and CSR : Lyon and Maxwell (2003)
Our paper belongs to the second strand. Main originality : analysis of the full policy cycle. P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
6/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Fundamentals of the model
A policy game between a regulator and a firm Pollution abatement q is the policy variable Firm’s abatement cost is C(q) C 0 ≥ 0, C 00 > 0, C(0) = C 0 (0) = 0
Regulator’s utility is U (q) with an interior maximum q ∗ U (0) = 0, U 0 (0) > 0, U 00 < 0 can be a welfare criterion, i.e. U (q) = B(q) − C(q)
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
7/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Timing 1
(CSR) The firm commits to a minimum abatement level r. This is verifiable and irreversible.
2
(VA) The regulator seeks to make a VA, with abatement level qV A.
3
(Legislation) In case of disagreement, the regulator initiate the legislative process.
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
8/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
The legislative process
The regulator initiate a legislative process by submitting a quota The quota is adopted (a law is enacted) with probability p<1 there are political imperfections in the congress
The regulator can influence p at cost γ(p) The case need to be prepared to convince legislators Assumptions : γ(0) = γ 0 (0) = 0 and γ 0 , γ 00 > 0. Technical : γ 000 ≥ 0
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
9/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Legislative stage The firms is already committed to some abatement r (CSR) The regulator proposes his optimal quota q ∗ , and selects p(r) = Argmax
pU (q ∗ ) + (1 − p)U (r) − γ(p)
p
Lemma 1 p(r) is a decreasing convex function. Preemptive effect : CSR decreases the occurrence of legislation. (less to gain in the Congress since some abatement is already granted)
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
10/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
VA stage The participation constraints write : U (q V A ) ≥ p(r)U (q ∗ ) + (1 − p(r))U (r) − γ(p(r)) ≡ U (r) C(q V A ) ≤ p(r)C(q ∗ ) + (1 − p(r))C(r) ≡ C(r)
Lemma 2 A VA always emerges in equilibrium. Intuition : 1
the regulator saves the legislative costs γ
2
No uncertainty, which benefits both parties (C 00 > 0, U 00 < 0)
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
11/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
VA stage Nash Bargaining
To parameterize the (Pareto-)frontier of the bargaining stage, we use the generalized Nash Bargaining solution the regulator has bargaining power α, the firm (1 − α) then the solution is given by : max q
[U (q) − U (r)]α [C(r) − C(q)]1−α
where U (r) and C(r) are the reservation utility and cost in the participation constraints. Denote the solution q V A (α, r)
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
12/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
CSR stage
The firm anticipates that a VA will take place When deciding upon r, the firm simply minimizes C(q V A (α, r))
Proposition 1 If the firm makes positive CSR efforts in equilibrium (r > 0), this reduces social welfare. This demonstrates that from the regulator’s perspective, CSR and VAs are not good complements.
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
13/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Existence of CSR in equilibrium Proposition 2 Let α denote the regulator’s bargaining power. There exists a unique value α ˆ ∈ (0, 1) such that the firm undertakes CSR abatement (r1 > 0) if and only if α > α ˆ. In other words, the firm preempts all the more that the regulator is a tough negotiator. low α : the firm gets a high fraction of what’s at stake in the negotiation the firm seeks a high stake
high α : the firm gets almost nothing in the negotiation can reduce the stake at the cost of a lower outside option P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
14/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Effect of the bargaining power Lemma 3 In equilibrium, VA abatement increases with the regulator’s bargaining power. Therefore, the regulator is always better off with a higher bargaining power.
even if there is more preemption by the firm in this case, the regulator still benefits from a better outcome in the negotiation. therefore Public Voluntary Programs are rather good solutions in a CSR context (by definition, PVP are take-it-or-leave-it offers, i.e. α = 1)
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
15/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Intermediate conclusions
CSR occurs for a high bargaining power of the regulator when it occurs it is socially detrimental is there a means to improve on that situation ? prohibiting CSR ?–does not make sense prohibiting VAs ?–next step
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
16/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
The game without VA
We consider a game where stage 2 is suppressed (i.e. only CSR→Regulation) let r2 denote the CSR level in this scenario the equilibrium level is given by : min {p(r)C(q ∗ ) + (1 − p(r))C(r)} r
Proposition 3 In the absence of VAs, the firm always commits to CSR activities : There is a unique equilibrium with CSR abatement r2 > 0.
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
17/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
The effect of CSR in absence of VA
Proposition 4 In the absence of VAs, CSR is beneficial and the regulator’s payoff increases with CSR activity. Obvious : choosing the same p as before yields a better outcome...
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
18/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Prohibiting VAs ?
Comparing the two games’ outcomes : α=0 with a VA, the regulator’s participation is binding : U (q V A ) = p(r1 )U (q ∗ ) + (1 − p(r1 ))U (r1 ) − γ(p(r1 )) without a VA : U (r2 ) = p(r2 )U (q ∗ ) + (1 − p(r2 ))U (r2 ) − γ(p(r2 )) but r1 = 0 in this case, therefore prohibiting VAs is desirable in this case
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
19/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Prohibiting VAs ? α=1 with a VA, the firm’s participation is binding, but : U (q V A ) > p(r1 )U (q ∗ ) + (1 − p(r1 ))U (r1 ) − γ(p(r1 )) without a VA : we have exactly r1 = r2 thus in this case a VA is desirable
with a VA, the regulator’s payoff is increasing in α, so that :
Proposition 5 There exists a unique value of the regulator’s bargaining power α ˜ ∈ (0, 1) such that prohibiting the use of VAs improves (damages) social welfare if α ≤ α ˜ (α > α ˜ ). P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
20/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Many firms
n identical firms, indexed by i the regulator cares about total abatement : X R= ri i
we consider unanimous VAs we analyze the two extreme cases, α = 0 and α = 1 NB Manzini & Mariotti (2003, 2004) : ”toughest firm principle”
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
21/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
What is the difference with the single firm case ?
Free-riding in the VA the participation problem But free-riding on CSR, too ! (positive) preemption externality between firms reduced CSR is a bad news for the regulator if VAs are prohibited
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
22/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Policy Cycle with a VA
At the regulatory stage, the regulator chooses p to maximize pU (nq ∗ ) + (1 − p)U (R) − γ(p) p(R) has the same properties as before VA stage α = 0 : firms do not invest in CSR (as before) α = 1 : the interesting case
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
23/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
VA analysis when α = 1 participation constraints : C(q V A ) ≤ p(R)C(q ∗ ) + (1 − p(R))C(ri )
i = 1..n
the firms can be divided into two groups : Laggards : L = {l ∈ {1..n}|rl = min ri } i
Others : M = {m ∈ {1..n}|rm > min ri } i
in a unanimous VA, one has necessarily : C(q V A ) = p(R)C(q ∗ ) + (1 − p(R))C(rl ) i.e. rl conditions the level of the VA for everyone P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
24/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
VA analysis when α = 1 (continued)
the first observation :
Lemma 4 In any equilibrium, there is exactly one laggard, and all the other firms choose the same CSR levels, equal to the forthcoming V A level : L = {l}, M = {1..n}\{l} 0 < rl < rm = q V A
∀m∈M
by contradiction : if there is more than one laggard, better to increase slightly CSR, to benefit from preemption since rl is unaffected.
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
25/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Equilibrium existence and uniqueness Proposition 6 There exists an essentially unique (i.e. up to the identity of firms) equilibrium when α = 1. It is the unique laggard equilibrium characterized by p0 (rl +(n−1)q V A )(C(q ∗ )−C(rl ))+(1−p(rl +(n−1)q V A ))C 0 (rl ) = 0 C(q V A ) = p(rl + (n − 1)q V A )C(q ∗ ) + (1 − p(rl + (n − 1)q V A ))C(rl ) one firm has a very low CSR activity (which benefits to the others) the other firms have already undertaken the abatement level of the VA P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
26/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Policy cycle without a VA
Proposition 7 There exists a unique symmetric equilibrium with CSR level r3 > 0, which is decreasing in n. Furthermore, 0 < rl < r3 < q V A .
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
27/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Comparisons of the outcomes
Lemma 5 When α = 1, the level of CSR is higher when a VA is forthcoming than under legislation only : rl + (n − 1)q V A > nr3 Therefore, we have overall :
Proposition 8 When α = 0, prohibiting VAs is socially desirable, while it is not is α = 1.
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
28/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Lobbying game
probability of successful legislation : p(γ, β) =
γ γ+β
where γ is the regulator’s effort, β the firms lobbying expenses in equilibrium p, is such that γ(p) is increasing and convex the analysis is preserved : the results hold under firm lobbying
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
29/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
Influencing the quota level
what if the Congress and the regulator fight about the level of abatement ? we show that this dimension is neutral in the analysis
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
30/31
Introduction
The basic model
Equilibrium Analysis
Many firms
Extensions
A Recap
Endogenous regulatory effort and regulation preemption CSR is good or bad depending on the regulatory instruments used CSR and VAs are not complements for the public authority Sometimes it is optimal to commit not to negotiate a VA Public voluntary programs should be considered in areas with high CSR activities
P. Fleckinger & M. Glachant
Corporate Social Responsibility or Voluntary Agreement?
31/31
