Corporate Social Responsibility (CSR) has attracted significant discussion and controversy since the times of Milton Friedman’s famous 1970 NYT article stating that the only social responsibility of firms is to maximize profits. However, the conclusion that CSR automatically is in conflict with profit maximization or strategic firm behavior and therefore should be reduced either to a market failure or some form of altruism turned out to be incorrect. Quite the opposite: my article in the Journal of Economic Literature jointly written with Jay Shimshack not only shows that CSR constitutes an economically important phenomenon that may well be strategic (i.e. profit maximizing), but also argues that, when concisely defined1, CSR can be efficient. In other words, it can be a viable private channel of public goods provision and a formidable complement or even alternative to classic government intervention.
Development institutions such as the World Bank Group stress that the private sector has an important role to play in the development of an economy, however, the supply of environmental, social or other goods (or the curtailment of bads) with public character is believed to be government and rule rather than market-driven. But what happens when governments and rules fail to provide these goods and services? While, it appears that markets and corporate behavior won’t be able to reach a social optimum e.g. when it comes to pollution or renewable energy levels, they often can do better than governments. In the short and middle term, CSR can be welfare optimal. Eventually improved public politics and CSR may even be mutually reinforcing elements in the longer run.