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On Fraud and Certification of Corporate Social Responsibility

Author

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  • Arguedas, Carmen

    () (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

  • Blanco, Esther

    (Department of Public Finance, University of Innsbruck)

Abstract

We analyze the strategic decision of firms to voluntarily certify corporate social responsibility (CSR) practices in a context where other firms can falsely pretend to be socially responsible. Equilibrium outcomes are crucially determined by consumers' beliefs about the credibility of firms' CSR claims, which depend in turn on the (expected) fines for fraud. First, we show that an increase in such fines extends the likelihood of firms investing in CSR, at the expense of a reduced likelihood of certification. Second, fraud only arises when the fines for fraud are at intermediate levels and some CSR firms do not certify their practices. Third, the presence of fraud comes at a cost for firms by inducing lower equilibrium prices than in settings with honest marketing. Fourth, the coexistence of fraud and certification induces differentiation price premia below marginal production costs and certification price premia above marginal certification costs. Lastly, social welfare rises as fines for fraud increase.

Suggested Citation

  • Arguedas, Carmen & Blanco, Esther, 2014. "On Fraud and Certification of Corporate Social Responsibility," Working Papers in Economic Theory 2014/02, Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History).
  • Handle: RePEc:uam:wpaper:201402
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    References listed on IDEAS

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    More about this item

    Keywords

    corporate social responsibility; credence goods; certification; fraud;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D43 - Microeconomics - - Market Structure, Pricing, and Design - - - Oligopoly and Other Forms of Market Imperfection
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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