Incentivising corporate social responsibility 

Our contemporary world has boasted of voluntary industry-wide agreements, which emerged out of necessity— as a way to promote corporate social responsibility (CSR). Competitors in our nation’s industries aspire together to pay fair wages or transition to less polluting products. We are already observing all this taking shape in Bangladesh.

A growing management literature endorses the idea. Economist Rebecca Henderson, for instance, calls for “industry-wide cooperation” to stop environmental degradation and economic inequality.

Joint decision-making could help reduce first-mover disadvantages that can dissuade companies from acting responsibly if it puts them at a competitive disadvantage. 

Firms coordinating their business decisions, however, raise antitrust concerns. To believers in the effectiveness of joint CSR agreements, this is no obstacle. They argue for exemptions from the cartel laws. At the same time, growing consumer awareness allows firms to build a comparative advantage in CSR. 

Permitting coordination of CSR efforts in nationwide industries, therefore may risk eliminating competition on this dimension, which could result in a reduction of CSR efforts.

Corporate leaders have analysed the issue through many types of joint agreements, that are deemed most effective at increasing CSR efforts, taking into account consumers’ growing awareness of CSR. In this article, we study different types of joint CSR agreements in a general model of oligopolistic competition, with goods that are differentiated by the CSR efforts of their manufacturers.

Bangladeshi firms may further play a sequential two-stage game. In Stage 1, they invest in CSR efforts, after which their CSR standard becomes public knowledge. In Stage 2, firms select their output. We assume that fixed costs increase because of CSR efforts and by extension allow for marginal costs of production to also depend on CSR – positively or negatively. Consumers are assumed to be willing to pay at least something for CSR. 

 This means that our local firms can steal business from their rivals by investing in a better CSR profile. In our baseline model, firms aim to maximise profit by attracting consumers willing to pay more for products produced by companies that invest in CSR. We also investigate how CSR incentives are affected by agreements if firms are intrinsically motivated to invest in CSR.

Bangladeshis need to compare three types of voluntary joint agreements with the benchmark case of firms that do not cooperate on CSR or output. In a CSR agreement, firms jointly determine their CSR efforts and remain in subsequent competition on the output market. In a production agreement, firms non-cooperatively select CSR investments and then jointly select output (or analogous prices). 

In the Western corporate world, this would raise immediate antitrust concerns. Here, in a full agreement, both strategic variables are coordinated – which may be the result in the practice of the previous two agreement types, once competitors are offered a platform to exchange commercially sensitive information and coordinate. Efforts to incentivise proposals to allow anti-competitive agreements to stimulate CSR have so far focused on CSR agreements. The Dutch competition authority, ACM, has an advanced set of guidelines for “sustainability agreements” that exclude price or production agreements. Can we do the same for the benefit of our Bangladeshi firms and production units?

In sharp contrast to green antitrust policy proposals, we find robust evidence that CSR agreements in Bang could also reduce CSR efforts compared with the non-cooperative benchmark – as do full agreements. The reason is that CSR coordination eliminates CSR as an aspect of competition so that the firms jointly profit from reducing their CSR investment costs. 

Again, a production agreement, by contrast, drawn in Dhaka could increase CSR efforts compared with the non-cooperative benchmark. In that case, investing in CSR would allow a firm to increase its market share, which is more attractive because the coordination of production increases the profit margin on each consumer. ThMoreover, we find that any agreement that is profitable for firms, so that they would voluntarily propose it, decreases consumer welfare. All agreements decrease total within-market welfare. This means that there is no way for firms to compensate consumers so that they are indifferent between an agreement and the non-cooperative benchmark. The conclusion, therefore, is that in the context of Bangladesh, the only type of agreement that would give firms an incentive to embrace CSR, which is a production agreement, cannot be exempted from existing cartel law, because it does not generate the means for full consumer compensation. 

The policy paradox is that society can only induce companies to invest more in CSR than they do in competition by allowing them to benefit from their additional CSR efforts at the expense of total within-market welfare.

Our efforts Instead, to exempt production agreements from cartel law, other benefits to non-consumers and in different markets, such as reduced negative production externalities that are mitigated by CSR effort, would need to be taken into account. 

Obviously, this raises several concerns. Apart from forcing competition agencies to make normative calls on redistributions between different groups in society, it will likely reduce their ability to demand substantial CSR efforts from the companies in return for being permitted to collude. Most findings are in line with the broader empirical literature on the positive relationship between competition and CSR activities. The timing of our work coincides with a surge of interest, especially in Europe, in allowing anti-competitive agreements to promote CSR efforts. There is a growing realization in Dhaka that certain social objectives require drastic measures that corporations should also take responsibility for. 

 This has further contributed to the debate by suggesting that relaxing cartel laws is not the appropriate way to increase CSR. We caution against the use of joint CSR agreements to increase CSR efforts in particular: They create incentives counter to desired results. Instead, with consumer awareness in Bangladesh urban areas are growing, competition is the stronger driver of CSR because it strengthens incentives to do well by doing good. .

The writer is a former educator based in Chicago, USA