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Incentives for social spending

Incentives for social spending
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First Published: Sun, Jul 18 2010. 08 21 PM IST
Updated: Sun, Jul 18 2010. 08 21 PM IST
Contrary to the provocative thesis of economist Milton Friedman a few decades ago that the social responsibility of business is to increase its profits, companies worldwide have slowly, but steadily, invested more in corporate social responsibility (CSR) initiatives. But, generally speaking, CSR costs are higher than their commercial benefits.
In a new report in the latest issue of Science, economists from two business schools in the US and Disney Research propose a new CSR strategy which they call shared social responsibility (SSR). Under this, if companies engage the social preferences of their customers, they can substantially improve the outcomes of CSR programmes.
Using a newly emerged pricing strategy centred on the social preferences of customers, referred to as “pay what you want”, authors did a field experiment in a large amusement park in the US. Participants chose a ride where they were photographed, and were later given a choice of purchasing a print of the photo, either at a traditional fixed price, or at a price they chose, where half of it went to charity. The question they asked was: Can a company gain from appearing philanthropic even in a humdrum product such as a souvenir photo?
The complex statistical analysis apart, the short answer is, yes. It also indicated that not only is SSR more profitable, but also that consumer concerns about fairness can be powerful and subtle. Part of the reason it works is that when contributions are customized, customers have a choice to directly express social welfare concerns. Observationally, we find that companies (for instance, some garment retailers offer cloth, instead of plastic carry bags, for a small additional cost) testing this idea do find takers.
Today, CSR has reached a stage where it isn’t just corporate. The government of India is working on a framework to quantify it, just like carbon credits, so as to encourage companies to undertake more CSR programmes. The department of public enterprises has readied guidelines for Central public sector units to take up important CSR projects to be funded by 2-5% of the company’s net profits. In these circumstances, SSR allows the stakeholders to provide new evidence and test models of social preference.
Can social responsibility and profits go hand in hand? Tell us at views@livemint.com
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First Published: Sun, Jul 18 2010. 08 21 PM IST