Incentives, performance and desirability of socially responsible firms in a Cournot oligopoly ☆ Luca Lambertini a , Alessandro Tampieri b, ⁎ a Department of Economics, University of Bologna, Strada Maggiore 45, 40125 Bologna, Italy b CREA, University of Luxembourg, Avenue de la Faencerie 162a, L-1511, Luxembourg abstract article info Article history: Accepted 22 May 2015 Available online 26 June 2015 Keywords: CSR Environmental externality Pigouvian taxation Market stability This paper investigates how socially responsible behaviour influences firms' profits and social welfare when production entails an environmental externality. We study a Cournot oligopoly with pollution, with one CSR operating in the market. A CSR firm not only takes into account its profits but also internalises its own share of pollution and is sensitive to consumer surplus. With a large enough market, the CSR firm obtains higher profits than its profit-seeking competitors, and induces a higher level of social welfare. The results are confirmed when a socially optimal tax on pollution is adopted. Indeed, even if the environmental concern restrains the production of a CSR firm, the social concern expands it. The second effect more than offsets the first one in a large market, making the CSR production strategy be more aggressive compared to its competitors. © 2015 Elsevier B.V. All rights reserved. 1. Introduction Corporate Social Responsibility (CSR) is a form of corporate self- regulation. A firm that follows rules of CSR (from now on, CSR firm) commits to a behaviour that takes into account not only the shareholder interests (profit), but also how the firm decisions affect the agents deal- ing with the firm (stakeholders), such as employees, business partners, consumers and the environment. 1 Over the past decades, an increasing number of private firms adopted a regime of CSR in any industry. 2 Public opinion and media increasingly demand companies to implement the social and environmental conse- quences of their activities and to provide more transparency with re- spect to their behaviour (Freeman et al., 2010). As a consequence, CSR has been ranked in 2011 as the number one focus of managers in the global retail and consumer goods sector (The Consumer Good Forum, 2011). While many firms now adopt some form of social responsibility, some are making it a core of their operations. For example, Starbucks has developed its C.A.F.E. guidelines, designed to take care of social and environmental aspects of coffee production. Tom's Shoes donates one pair of shoes to a child in need for each pair sold. Ben and Jerry's makes use of only fair trade ingredients and has created a dairy farm sustainability programme (Fallon, 2014). One important aspect of CSR behaviour is the commitment towards the environmental impact of the firm. There are generally three explanations on why firms adopt CSR principles with the respect to environmental issues: [i] the firm may rationally anticipate that environmental regulation will become stricter and therefore her anticipated concerns may create to her a competitive advantage; [ii] corporate managers have environmental preferences or share- holders have, and ask managers to follow a strategy consistent with them; [iii] green consumers penalise firms without environmental concerns, raising pollution costs and therefore acting as a sort of Pigouvian tax mechanism. Economic Modelling 50 (2015) 40–48 ☆ We would like to thank Rodney Beard, Flavio Delbono, Vincenzo Denicolò, Valeria Di Cosmo, Luigi Alberto Franzoni, Maria Gil-Molto, Timo Goeschl, Thomas Jeitschko, Ian Lang, Arsen Palestini, Fausto Panunzi, Lorenzo Sacconi, Richard Tol, Pia Weiss, the Editor Sushanta Mallick and two anonymous referees for comments that lead to a substantial improvement of the paper. Earlier versions have been presented at the workshop on Corporate Governance and Stakeholder Value: a Law and Economics Perspective 2010 (Bologna), the SES Conference 2011 (Perth), the IIOC 2011 (Boston), the EPSF 2011 (Exeter), the EAERE Conference 2011 (Rome) and seminars at the ESRI (Dublin) and the University of Edinburgh, where we received helpful suggestions. We would like to thank HERA spa for sponsoring this project. The usual disclaimer applies. ⁎ Corresponding author. E-mail addresses: luca.lambertini@unibo.it (L. Lambertini), tamp79@gmail.com (A. Tampieri). 1 To cite some, for the World Business Council for Sustainable Development in its pub- lication “Making Good Business Sense” (Holme and Watts), “Corporate Social Responsibility is the continuing commitment by business to behave ethically and contrib- ute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large”. The CSR definition used by Business for Social Responsibility is “operating a business in a manner that meets or exceeds the ethical, legal, commercial and public expectations that society has of busi- ness”. The European Commission hedges its bets with two definitions wrapped into one: “A concept whereby companies decide voluntarily to contribute to a better society and a cleaner environment. A concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis”. For more on this, see www.mallenbaker.net/csr/definition.php. 2 Recent examples can be found in the reports on CSR of Accenture (2013), KPMG (2011), Ernst and Young (2011), and McKinsey and Company (2007), inter alia. http://dx.doi.org/10.1016/j.econmod.2015.05.016 0264-9993/© 2015 Elsevier B.V. All rights reserved. Contents lists available at ScienceDirect Economic Modelling journal homepage: www.elsevier.com/locate/ecmod