How do behavioral biases affect backfiring of intensified auditing on corporate social responsibility?

Auditing is widely used to motivate suppliers to exert more corporate social responsibility (CSR) efforts. However, trade journals reported that intensified auditing backfired, reducing suppliers’ CSR efforts and prompting them to hide violations to pass audits. We conduct an experiment to examine suppliers’ behavioral biases and their impact on this “backfiring effect”. The experiment provides evidence for two key behavioral biases: loss aversion and probability weighting. Interestingly, the two biases have opposite influences: loss aversion mitigates, but probability weighting aggravates the “backfiring effect”. Despite their conflicting influences, our analysis reveals that loss aversion dominates, resulting in an overall alleviation of the “backfiring effect” by behavioral biases. Our findings imply that, in practice, managers can improve CSR by making good use of behavioral biases’ positive impact.