Corporate Social Responsibility and Social Entrepreneurship

Authors


  • The author thanks Daniel Diermeier, two anonymous referees, and seminar participants at the Katholieke Universiteit Leuven and Stanford University for their comments.

ABSTRACT

Milton Friedman argued that the social responsibility of firms is to maximize profits. This paper examines this argument for the economic environment envisioned by Friedman in which citizens can personally give to social causes and can invest in profit-maximizing firms and firms that give a portion of their profits to social causes. Citizens obtain social satisfaction from corporate social giving, but corporate giving may not be a perfect substitute for personal giving. The paper presents a theory of corporate social responsibility (CSR) and shows that CSR is costly when it is an imperfect substitute. When investors anticipate the CSR, shareholders do not bear its cost. Instead, the entrepreneurs who form the CSR firms bear the cost. Shareholders bear the cost of CSR only when it is a surprise, and it is to such surprises that Friedman objects. A social entrepreneur is willing to form a CSR firm at a financial loss because either doing so expands the opportunity sets of citizens in consumption-social giving space or there is an entrepreneurial warm glow from forming the firm. Firms can also undertake strategic CSR activities that increase profits, and a social entrepreneur carries strategic CSR beyond profit maximization and market value maximization. The paper also examines the implications of taxes and the effect of the market for control for the sustainability of CSR.

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