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Contract Duration and Socially Responsible Investment

Author

Listed:
  • Meg Adachi-Sato

    (School of Economics, Finance, and Marketing RMIT University, AUSTRALIA and Research Institute for Economics and Business Administration, Kobe University, JAPAN)

Abstract

This paper shows how a socially and environmentally aware firm principal can motivate a profit-oriented manager to pursue environmental, social and governance (ESG) outcomes by adjusting the length and timing of wage contracts. In the model, the manager produces a verifiable output that is detrimental to ESG, but also engages in an unverifiable output that reduces ESG costs. The optimal arrangements are a short-term contract if the unverifiable output reduces ESG costs, and a long-term contract if it does not. The paper also demon-strates how social impact bonds can be more effective than short-term debt to finance social programs.

Suggested Citation

  • Meg Adachi-Sato, 2021. "Contract Duration and Socially Responsible Investment," Discussion Paper Series DP2021-14, Research Institute for Economics & Business Administration, Kobe University.
    • Handle: RePEc:kob:dpaper:dp2021-14
    as

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    References listed on IDEAS

    as
    1. Pástor, Ľuboš & Stambaugh, Robert F. & Taylor, Lucian A., 2021. "Sustainable investing in equilibrium," Journal of Financial Economics, Elsevier, vol. 142(2), pages 550-571.
    2. Sunil Dutta & Stefan Reichelstein, 2003. "Leading Indicator Variables, Performance Measurement, and Long‐Term Versus Short‐Term Contracts," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 837-866, December.
    3. Farrell, Joseph & Shapiro, Carl, 1989. "Optimal Contracts with Lock-In," American Economic Review, American Economic Association, vol. 79(1), pages 51-68, March.
    4. Bernheim, B Douglas & Whinston, Michael D, 1998. "Incomplete Contracts and Strategic Ambiguity," American Economic Review, American Economic Association, vol. 88(4), pages 902-932, September.
    5. Eleonora Broccardo & Oliver D. Hart & Luigi Zingales, 2020. "Exit vs. Voice," Working Papers 2020-114, Becker Friedman Institute for Research In Economics.
    6. Hart, Oliver & Zingales, Luigi, 2017. "Companies Should Maximize Shareholder Welfare Not Market Value," Journal of Law, Finance, and Accounting, now publishers, vol. 2(2), pages 247-275, November.
    7. Opp, Marcus & Oehmke, Martin, 2020. "A theory of socially responsible investment," CEPR Discussion Papers 14351, C.E.P.R. Discussion Papers.
    8. Tortorice, Daniel L. & Bloom, David E. & Kirby, Paige & Regan, John, 2020. "A Theory of Social Impact Bonds," IZA Discussion Papers 13431, Institute of Labor Economics (IZA).
    9. Mark V. Pauly, 2017. "Social Impact Bonds: New Product or New Package?," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 33(4), pages 718-760.
    10. John Morgan & Justin Tumlinson, 2019. "Corporate Provision of Public Goods," Management Science, INFORMS, vol. 65(10), pages 4489-4504, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Socially responsible investment; ESG; Multitask; Hold-up; Incomplete contracts; Social impact bonds; Sustainability-linked bonds;
    All these keywords.

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility

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