1. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Moral hazard and moral motivation: Social corporate responsibility as labor market screening Kjell Arne Brekke og Karine Nyborg

2. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Corporate Social Responsibility Ruled out by competition? CSR: “… companies integrate social and environmental concerns … on a voluntary basis" Higher cost, lower profit? –Investors get higher return elsewhere –Their product more expensive than competitors –Eventually driven out of business Really? –Customers and workers

3. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Basic assumptions No “green” consumers –Effect of “dolphin safe tuna” still debated. Morally concerned workers –24 000$ per year more to work in American Cancer Society rather than Camel Cigarettes. –Witnesses for/against tobacco industry Moral hazard within firms –Firms with moral workers perform better

4. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Screening You own a business in city A and want to open one in city B –You gain if the manager is trustworthy –You loose if the manager is not trustworthy –How to pick the right manager? Solution: –Be responsible – at a cost –Hire those who think it is worth the cost

5. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Firms and market Firms –Fixed cost (capital) –Decreasing returns to scale (capacity limit) –May pay fixed abatement cost –With abatement, no emissions. Market –Zero profit (competition) –Wage = marginal productivity (optimal labor demand)

6. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Workers Moral self-image –What would be the consequences if everybody acted like me? Tradeoff –Moral responsibilities –Private benefits Two decision variables –Effort within firm –Work in green or brown firm

7. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Green and brown firms Green: Abatement cost but no emissions Wages –Workers choose green even at lower wages –The stronger the moral motivation the higher the acceptable wage difference Moral workers –Accept lower wage from green firms –Work harder (for the common good within firms)

8. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Equilibrium Abatement expensive and effort not important –Green firms cannot compete with brown Abatement less expensive and effort important –Brown firm cannot compete with green Intermediate parameter –Both firms exist –Green firms hire the morally most concerned

9. © SUM – CENTER FOR DEVELOPMENT AND THE ENVIRONMENT UNIVERSITY OF OSLO Policy implications; Why formal modeling? Questions existing models with no voluntary abatement Disclosure strategies –Environmental accounting –Regulations to enhance transparency Environmental taxes may –Crowd in voluntary contribution (signal of importance) –Crowd out voluntary contribution (abatement no moral issue)