Caring or Pretending to Care? Social Impact, Firms’ Objectives, and Welfare

Abstract

Many firms claim that “social impact” influences their strategies. This paper develops a structural model that quantifies social impact as the sum of surpluses to a firm and its stakeholders. With data from a for-profit firm whose prosocial expenditures are measurable and salient to consumers, the analysis shows that the firm spends prosocially beyond profit maximization, thereby increasing welfare substantially. Incentivizing a standard profit-maximizing firm to behave similarly would require subsidies amounting to 58% of its prosocial expenditures, because consumers’ willingness to pay is relatively inelastic to prosocial expenses. Therefore, social impact resembles a self-imposed welfare-enhancing tax with limited pass-through.