Should Corporations Be Do-Gooders? Part 2

Adam Ozimek -- blogger at Modeled Behavior and associate at Econsult Corporation

Yesterday I discussed why corporate social responsibility can be efficient. Today I wanted to discuss some likely objections to this and some problems that are likely to arise. 

An important risk is when corporations pursue things which are seen as public goods or socially responsible but have serious tradeoffs that may result in negative welfare overall. For instance, many consumers seem to like knowing that their goods are made by workers with good jobs and decent pay. So firms may overpay workers or restrict working conditions relative to what negotiations between the firm and the workers would produce. When wages are raised without increases in productivity then the firm will generally end up employing fewer workers, and thus those workers who would otherwise have been hired end up worse off. Another problem is that firms may comply with consumer desires to not buy things made from low paid workers by simply using robots or by hiring workers with higher productivity and thus better job alternatives. 

You might think that consumers can counteract the disemployment effect by also demanding that firms don't employ less workers than they otherwise would, but this is almost impossible to monitor. Absent a way to credibly demonstrate this, firms pressured into raising wages are more likely to profit maximize and thus employ fewer workers. 

It is important to note that if higher wages are satisfying the desires of consumers, then this is efficient even if it causes disemployment of some workers. The problem is when consumers who want the higher wages are unaware of the tradeoffs faced and don't actually prefer raising wages for some and unemploying others. They instead imagine a free lunch, and that is what they believe they are paying for. If this informational problem exists, then it is not efficient. In fact, I don't believe consumers understand these tradeoffs very well, and I would cite the response to Apple and Foxconn as evidence this is the case. 

Yesterday I mentioned a similar problem discussed in Tyler Cowen's new book. Locavores see themselves as paying a premium and doing good, but are sometimes actually purchasing goods which are more harmful for the environment. This is why the price system is so valuable, because it can communicate clearly what the relative costs are, while consumers trying to guess at this can be extremely complicated and can easily lead to mistakes. 

The difficulty in figuring out which goods pollute the least is why it can be better for the government to incorporate some externalities into the price system by explicitly taxing them. When it is unclear how these externalities will ripple through markets the problem can be better solved through transparent taxes than to let consumers and corporate social responsibility do the work. 

So what should we as consumers, shareholders, and workers think about corporate social responsibility? Unfortunately, despite all the words I've spent on this I don't think I can do any better than a simple lesson: think hard about the tradeoffs.