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Economic SYNOPSES short essays and reports on the economic issues of the day 2008 ■ Number 22 Strategic Social Responsibility Rubén Hernández-Murillo C Siegel and Vitaliano found that firms selling experience and orporate social responsibility (CSR) is a concept that credence goods and services are more likely to engage in CSR promotes expanded social stewardship by businesses and than those selling search goods. The difference is explained by organizations and has gained popularity in recent years. consumers’ perception of a firm’s involvement in CSR (even when CSR suggests that corporations embrace responsibilities toward its product does not directly include an ethical component) as a a broader group of stakeholders (customers, employees, and the valuable signal, particularly when associated with upscale goods community at large) in addition to their customary financial obliand services for which prices do not convey all the necessary gations to shareholders. Social activists often pressure corporations information about the firm’s reliability and its commitment to to engage in CSR by integrating some ethical feature in their quality and honesty. Among the firms listed in the “100 Best product or undertaking some type of social investment. Firms Corporate Citizens” ranking for 2007, only one-fourth produce are also ranked in terms of their CSR. search and nondurable experience goods; the remaining 75 perAlthough some economists are concerned about the viability cent produce durable experience goods or experience or credence of CSR in a competitive environment, recent studies suggest that services (see chart).2 These findings suggest that engaging in CSR engaging in CSR can be consistent with profit-maximization activities can be a rational and crucial profit-maximization decibehavior. These studies argue that CSR can be considered a form sion regarding a firm’s differentiation strategy. ■ of strategic investment for building and maintaining the firm’s 1 Siegel, Donald S. and Vitaliano, Donald F. “An Empirical Analysis of the Strategic reputation. Other benefits derived from CSR may include the Use of Corporate Social Responsibility.” Journal of Economics and Management ability to charge a premium for products or the ability to recruit Strategy, Fall 2007, 16(3), pp. 773-92. and retain certain types of workers. In fact, consumers’ shopping 2 This ranking by the Corporate Responsibility Office evaluates the social performpatterns suggest that some socially concerned individuals are willance of approximately 1,000 publicly held U.S. corporations (roughly the same universe of firms analyzed by Siegel and Vitaliano) on several categories, including ing to pay a price premium for goods that incorporate a social or financial performance, accountability toward local communities, governance, ethical component (e.g., hybrid automobiles or beauty products fairness to employees, environmental responsibility, human rights, and product not tested on animals) because they value these characteristics. characteristics; the complete list for the “100 Best Corporate Citizens” is at www.thecro.com/files/100BestGatefold.pdf. Economists Donald Siegel and Donald Vitaliano analyzed the role of CSR as a signaling device to convey information about the firm’s product quality.1 Their study 100 Best Corporate Citizens, 2007 of a large sample of publicly traded firms classified the Frequency firms using North American Industry Classification System 50 codes into the following five categories: search goods (those whose quality can be readily evaluated before purchase, 45 e.g., clothing, footwear, furniture); nondurable experience 40 goods (those whose quality is experienced over multiple 35 uses and frequent purchases, e.g., food, health and beauty 30 products); durable experience goods (those that must be 25 consumed before their true value can be determined, permit less learning from repeated purchases, and require a 20 longer period for the product’s characteristics to be fully 15 known, e.g., automobiles, appliances); and finally, experi10 ence services and credence services (those that often involve 5 strong information asymmetries between sellers and buy0 ers, who may find it difficult to assess the service’s value Search Nondurable Durable Experience Credence even over a long period, e.g., banking, financial counselGoods Experience Experience Services Services Goods Goods ing, auto repairs, weight loss programs). Views expressed do not necessarily reflect official positions of the Federal Reserve System. research.stlouisfed.org