Managerial Contracting and Corporate Social Responsibility

27 Pages Posted: 17 Oct 2006 Last revised: 29 Sep 2009

See all articles by David P. Baron

David P. Baron

Stanford University - Graduate School of Business

Date Written: September 1, 2006

Abstract

This paper presents a positive theory of corporate social responsibility set in a managerial capitalism context in which managers instead of markets allocate resources, including social expenditures. The theory focuses jointly on the operational management of the firm and on its social expenditures as influenced by a compensation contract chosen by shareholders in a capital market that prices social expenditures. The theory provides three explanations for compensation systems that encompass social performance. First, consumers may reward the firm for its social expenditures; second, managers may have personal preferences for contributing to social causes; and third, the shareholder clientele a firm attracts may prefer social expenditures. The more consumers reward the firm for its social expenditures the higher powered are the profit incentives, so management compensation in increasing in corporate social expenditures. In the theory firms with higher ability managers have both higher operating profits and higher social expenditures when times are good, so a positive correlation is predicted. In bad times, however, the correlation is negative, except for firms with very low ability managers in very bad times, where the correlation is zero.

Keywords: corporate social responsibility

JEL Classification: G34, M14, J33

Suggested Citation

Baron, David P., Managerial Contracting and Corporate Social Responsibility (September 1, 2006). Stanford GSB Research Paper No. 1945, Rock Center for Corporate Governance Working Paper No. 20, Available at SSRN: https://ssrn.com/abstract=937945 or http://dx.doi.org/10.2139/ssrn.937945

David P. Baron (Contact Author)

Stanford University - Graduate School of Business ( email )

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