This paper analyzes the interplay between firms' self-regulation (often denoted as corporate social responsibility) as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market (conscious consumers that take into account the external effects of their purchase) by providing more socially responsible goods. However, because regulation is the outcome of a political process, an increase in activism might imply an inefficiently high externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less efficient) goods.We thank Guillermo Caruana, Humberto Llavador and a referee for helpful comments. We also benefited from comments by audiences at
It is commonly argued that in recent years pharmaceutical companies have targeted their research and development (R&D) at small improvements of existing compounds instead of riskier drastic innovations. In this paper, we show that the bias in the pharmaceutical industry toward small innovations might be driven by the low sensitivity of the demand. In particular, small innovations get a proportionally larger reward because pharmaceutical firms target them at the inelastic segments of the demand. As a consequence, firms find it relatively more profitable to invest in small innovations. We also study the effect on R&D incentives of marketing strategies and regulatory instruments aimed at controlling pharmaceutical expenditure.
We study both theoretically and empirically the relationship between different types of corporate social responsibility (CSR) and a firm's product quality. On the one hand, observable external CSR (e.g., a firm's involvement in a social project) can be used as a signal to unobservable product quality. On the other hand, internal CSR (e.g., human resources practices such as training and labor stability) can improve a firm's labor productivity, specially in firms supplying high quality. We show that CSR may serve as a tool for a firm's product differentiation strategy, finding that both internal and external CSR enhance a firm's product quality. Moreover, this implies the existence of complementarity between internal and external CSR (they mutually reinforce each other) through product quality. We test our theoretical results with data from the hotel industry where we show that hotel establishments with a higher product quality are indeed more likely to be socially responsible, both internally and externally, indicative of the existence of complementarity.
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We consider a procurement problem in which the procurement agent is supposed to allocate the realization of a project according to a competitive mechanism that values bids in terms of the proposed price and quality. Potential bidders have private information about their production costs. Since the procurement agent is also in charge of verifying delivered quality, in exchange for a bribe, he can allow an arbitrary …rm to be awarded the realization of the project and to produce a quality level lower than the announced. We compute equilibrium corruption and we study the impact on corruption of the competitiveness of the environment, and in particular of: i) an increase in the number of potential suppliers of the good or service to be procured, and ii) an increase of competition in the market for procurement agents. We identify the e¤ects that in ‡uence equilibrium corruption and show that, contrary to conventional wisdom, corruption may well be increasing in competition.
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