Events at CERGE-EI

Dr. Justin Tumlinson

CESifo Group Munich, Germany

Authors: John Morgan and Justin Tumlinson

Abstract: Firms spend considerable amounts on socially responsible business practices. These expenditures are often seen as an indirect form of profit maximization or a perquisite of the manager at shareholder expense. We offer a more direct explanation, absent agency issues or indirect profit maximization --- the manager simply acts in the interest of shareholders. Since shareholders care about consumption and public goods, managerial contracts will reflect these mixed motives. Our main result is that, under mild conditions, the firm produces the socially optimal output, despite the mismatch between shareholder preferences and those of society at large. Managers will also redirect more of the profits toward public goods than shareholders would when acting separately. The results are robust to endogenous formation of socially responsible firms and the possibility of takeover by a profit maximizing outsider.

Full Text:  “Corporate Provision of Public Goods”