THE CSR FIRM PERFORMANCE MISSING LINK
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English

THE CSR FIRM PERFORMANCE MISSING LINK

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Niveau: Supérieur
THE CSR-FIRM PERFORMANCE MISSING LINK: COMPLEMENTARITY BETWEEN ENVIRONMENTAL SOCIAL AND BUSINESS BEHAVIOR CRITERIA? Sandra CAVACO Patricia CRIFO Cahier n° 2010-19 ECOLE POLYTECHNIQUE CENTRE NATIONAL DE LA RECHERCHE SCIENTIFIQUE DEPARTEMENT D'ECONOMIE Route de Saclay 91128 PALAISEAU CEDEX (33) 1 69333033 mailto: ha l-0 05 04 74 7, v er si on 1 - 21 J ul 2 01 0

  • dimensions such

  • rating

  • social responsibility

  • links between

  • extra-financial ratings

  • strategies into multiple

  • practices

  • firm performance

  • corporate social


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Nombre de lectures 22
Langue English

Exrait


ECOLE POLYTECHNIQUE
CENTRE NATIONAL DE LA RECHERCHE SCIENTIFIQUE

THE CSR-FIRM PERFORMANCE MISSING LINK:
COMPLEMAENNDT ABRUISTIYN EBSEST WBEEEHNA VEINOVRI RCORINTMEERINAT?A

L SOCIAL
Sandra C

AVACO
Patricia

CRIFO

Cahier n°2010-19

DEPARTEMENT D'ECONOMIE
Route de Saclay
91128 (P33A)L 1A 6IS93E3A3U0 3C3 EDEX
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TheCSR-FirmPerformanceMissingLink:
ComplementarityBetweenEnvironmental,Social
andBusinessBehaviorCriteria?
!

SandraCavaco

andPatriciaCrifo

July9th,2010

Abstract
Thisarticleanalyzestherelationshipbetweencorporatesocialresponsi-
bility(CSR)andfirmperformancebyproposingatheoreticalmodelandby
testingempiricallyitsmainpredictionsonamatchedpaneldatabaseforthe
biggestEuropeanlistedfirmsoverthe2002-2007period.Ourdatasetgathers
twosourcesofinformation:environmental,socialandgovernance(ESG)rat-
ingsfromtheVigeodatabase,andeconomicandfinancialperformancedata
fromtheOrbisdatabase.UsingtheSystemGMMestimatorfordynamic
paneldatamodel,wetestthecomplementarityandsubstitutability,thatis
thesuper-andsub-modularitybetweenvariouscorporatesocialresponsibility
practices,alongwithitsimpactonfirmperformance.Wedoobservethata
complementaritypremiumonspecificCSRdimensions(humanresourcesand
businessbehaviortowardscustomersandsuppliers)existsbutalsothatsome
practicesarerelativesubstitutes(environmentandbusinessbehaviors).
Keywords
:Corporatesocialresponsibility,supermodularity,paneldata.
JELCodes
:M14,L21,C33.

!
WewouldliketothankKathrynShaw,PierreMohnen,EricStrobl,JosephLanfranchi,Isabelle
MejeanandVaninaForgetfortheirhelpfuladvices,andAbelLucenaforhishelpontheempirical
analysis.Wealsothankfortheirhelpfulremarksandsuggestionstheparticipantsatthefollowing
conferencesandseminars:Coinvest(Lisbon2010),CAED(Tokyo2009),ICQME(ENSAEParis
2009),NancyII,ParisII,ParisWest,CEEandE´colePolytechniqueCSR’sworkgroup.Ofcourse,
weremainresponsibleforallresidualerrorsoromissions.WearegratefultoVigeoforgranting
usaccesstotheirdata.PatriciaCrifoacknowledgesthesupportoftheChairforSustainable
FinanceandResponsibleInvestment(Toulouse-IDEIandE´colePolytechnique)andtheChairfor
BusinessEconomics(E´colePolytechnique).Accesstofinancialdata(Orbis)waspossiblethrough
theX-HEC-GISpartnership.

LEM,UniversityParisIIPantheon-AssasandCPP,AarhusSchoolofBusiness.
sandra.cavaco@u-paris2.fr.

UniversityParisX,E´colePolytechniqueandIRES,CatholicUniversityofLouvain.patri-
cia.crifo@polytechnique.edu.

1

1Introduction

Thisarticleexaminesthee
!
ectsofcorporatesocialresponsibility(CSR)onfirm
performance.Aconsiderableattentionhasbeengiventothisissueforthepast
threedecades,especiallyinmanagementsciencesandorganizationaleconomics,but
noconsensushasemergedsofaronwhethercorporatesocialresponsibility(CSR)
leadsornottosuperiorperformance
1
.DoCSRstrategiesimproveperformanceor,
aretheycostlyCSRpracticesadoptedbyfirmswhereperformanceisalreadyhigh
or,wherethesepracticesaremostlikelytoimproveperformance?
Beingsociallyresponsiblemeansthat,beyondlegalconstraints,firmscommiton
avoluntarybasistobearthecostofamoreethicalbehavior(EuropeanCommis-
sion,2001).
2
Forinstance,CSRstrategiesimplytoimproveemploymentconditions
and/orbanchildlaborincountriesthatdonotrespecthumanrights,protectthe
environmentandinvestinabatementequipmenttoreducecarbonfootprint,develop
partnershipswithNGOs,orprovidefundstocharity,etc.Therefore,CSRisinher-
entlymulti-facetedanditiscrucialtounderstandwhysomebusinessesadoptthese
practiceswhileothersdonotaswellaswhichtypesofpracticesaremoreprofitable.
Thisarticlehelpsanswerthesequestionsbyinvestigatingwhichcombinations(or
clusters)ofCSRstrategiesaremostlikelytoimprovefirmperformance.
ToexaminetheimpactofclustersofCSRpracticesonfirmperformance,we
proposeatheoreticalmodelandtestitsmainpredictionsonarichdatapanelset
ofCSRandperformanceindicatorsforthebiggestEuropeanlistedfirmsduringthe
2002-2007period.
OurtheoreticalmodelformalizesCSRdecisionsasamulti-tasksagencyprob-
lemwithmoralhazardinwhichshareholdersdelegateCSRtomanagers,withthe
CSRtasksbeingevaluatedexogenouslybyanextra-financialratingagency.More
precisely,oneachCSRtask,thefirmmayreceivearatingeitheraboveorbelow
sectoralaverage.Extra-financialevaluationsareexogenousandpublicyobservedby
bothparties.TheimpactofCSRdecisionsonfirmperformancethendependson
thedegreeofcomplementaritybetweenthedi
!
erentCSRtasks.Giventheextra-
financialevaluation,twoCSRtasksarecomplementarywhenthecostofe
!
ortin
oneCSRtaskdecreaseswhenanotherCSRtaskisimplemented
3
.Weshowthat
extra-financialratingshaveapositiveimpactonCSRe
!
ortswhenatleasttwopairs
ofCSRtasksarecomplementary.WhenonlyonepairofCSRtasksiscomplemen-
tary(and/oranotheroneissubstitutable)thenCSRratingshaveanambiguous
1
ForareviewofresultsfromtheseempiricalstudiesseeMargolisandWalsh(2003)orMargolis,
ElfenbeinandWalsh(2007).
2
In2005,52%ofthetop100corporationsinthe16moreindustrializedcountriespublisheda
reportontheircorporateandsociallyresponsible(CSR)activities(Becchettietal.2005a).Inthe
U.S,1dollaroutof9investedonfinancialmarketsin2007embeddedadimensionofCSR(11%),
3%inFranceandnearly4%inEurope(EFAMA2008andEuroSIF2008).
3
Inotherwords,twoormoretasksarecomplementswhenusingonemoreintenselyincreases
themarginalbenefitofusingothersmoreintensively(seeMilgromandRoberts,1995).Inour
model,thischaracteristicsisformalizedintermsofcostcomplementarity.

2

impactonCSRe
!
ortsandfirmperformance.Hence,weshowthattheimpact
ofCSRratingsonfirmperformancedependsonthedegreeofcomplementarityor
substitutabilitybetweenthedi
!
erentCSRtasks.
ThemainpredictionsofourmodelarethentestedonamatchedCSR-Firm
performancedatabasepanelofthebiggestEuropeanlistedfirmsoverthe2002-2007
period.WeexaminewhetherCSRispositivelycorrelatedwithfirmperformance
andhowthecomplementarityorsubstitutabilitybetweentheCSRtasksa
!
ectsthis
relationship,giventheextra-financialratings.
Inourdataset,theCSRvariablesconsistinratingsattributedbytheFrench
environmentalandsocialratingagencyVigeoover3broaddomainsoffirms’cor-
poratesocialresponsibility:humanresources,environment,andbusinessbehavior
towardscustomersandsuppliers.
ThefirmperformancevariablescomefromtheOrbisdatabase(BureauVan
Dijk)andconsistindetailedinformationfromthecompanies’standardizedannual
accounts(cashflow,operatingratios,totalassets,profitabilityratiosetc.).
AsimpleanalysisontheVigeodatabaserevealsthatthedistributionofcorre-
lationamongenvironmental,humanresourcesandbusinessbehaviorratingsshows
positivecorrelationsbetweenthesedimensions.Thispatternisclearlyconsistent
withtheideathatcorporatesocialresponsibility,decomposedintoenvironmental,
socialandbusinessbehaviorfactors,wouldbecomplementaryinputsoffirmperfor-
mance.ToestimatethelinksbetweenCSRandfirmperformance,weexploitthe
dynamicdimensionofourdatasetthroughtheSystemGMM(GeneralizedMethod
ofMoments)techniqueandestimatetheimpactofCSRpracticesonfirmperfor-
mance.Thenwetestexplicitlythecomplementaritybetweenenvironmental,human
resourcesandbusinessbehaviors,anddeterminewhichpairsofpracticesarecom-
plementaryorsubstitutableinputsoffirmperformance.Wedoobservethatsome
practicesarecomplementary(humanresourcesandbusinessbehaviortowardscus-
tomersandsuppliers),butotherCSRdimensionsarealsosubstitutes(environment
andbusinessbehaviors).
Thispaperisorganizedasfollows.Section2presentsasyntheticreviewofthe
literatureonthelinksbetweenCSRandfirmperformance.Section3developsthe
theoreticalmodelanditsmaintheoreticalpredictions.Thedataandvariablesare
presentedinsection4.Theempiricalmethodologyandresultsaredevelopedin
section5.Section6concludesthearticle.

3

2BriefReviewontheCSR-FirmPerformance
kniL

ManyreasonsintheliteratureareinvokedtoexplaintheprevalenceofCSRstrate-
gies:shrinkingroleofgovernments,society’sdemandsforgreaterdisclosureand
increasedconsumers’interestinCSR,growinginvestorpressure,competitiononla-
bormarketsforcompetentandmotivatedemployees,increasingrisksassociatedwith
unethicalbehaviors,importanceoftakingintoaccountrelationshipswithsuppliers,
externalpressurefromthecivilsociety,etc.CSRstrategieswouldinfactallowfirms
tomaximizevalueandtominimizeriskinthelongruninordertorespondtoan
increasedcompetitivepressureandmarketdi
!
erentiation.Suchstrategieswould
moregenerallyallowtakingintoaccountthegrowingdemandsoftheirstakehold-
ers(customers,consumers,employees,savers).AccordingtoBenabouandTirole
(2010),theseargumentscapturethreealternativevisionsofCSR.Inthefirstvision,
CSRwouldbea’win-win’strategywherebyCSRwouldmakeafirmprofitable.
Thisvisionisalsoknownasthe‘Porterhypothesis’or’doingwellbydoinggood’
(seePorterandvanderLinde,1995andPorterandKramer,2002).Inthesecond
vision,CSRwouldbeequivalenttodelegatedphilanthropy,thefirmbeingachannel
fortheexpressionofcitizenvalues.Underbothvision1and2,profitmaximization
andCSRareconsistent.ThethirdvisioninterpretsCSRasinsider-initiatedcor-
poratephilanthropy,notmotivatedbystakeholders’demandbutratherreflecting
management’sowndesiretoengageinphilanthropy.Inthiscase,profitisthennot
maximized.Here,wefocusonstrategicCSR,thatisonCSRasastrategicdeci-
siondesignedtoimprovefirmperformanceandexaminewhichcombinationsofCSR
practicesmostlikelyincreaseprofitability.
The
theoreticalliterature
onthedeterminantsofstrategicCSRdecisions
focusesonvariousaspectsofafirm’sCSRstrategy.Alargenumberofarticles
considerCSRasaproductdi
!
erentiationstrategy(seeamongothersBaron(2007,
2008),BesleyandGhatak(2007),Gra
!
ZivinandSmall(2005),Becchettietal.
(2005aandb),Manasakisetal.(2007)).Otherapproaches,forinstanceBaron
(2009),BagnoliandWatts(2003)orHeyesandMaxwell(2004),considerCSRas
aprivateprovisionofapublicgoodorasmoraldutytoundertakesocialactivities
andanalyzeinteractionsbetweenfirms,NGOsand/orregulators(inparticularpre-
emptionbehaviors,seeLyonandMaxwell,2004)).FocusingonstrategicCSR,
CespaandCestone(2008)formalizeCSRdecisionasstakeholderprotectionand
managerialentrenchment.
ThesemodelsonthedeterminantsofstrategicCSRadoptionarecompatiblewith
the‘Porterhypothesis’.Eachmodelo
!
ersaveryinsightfulanalysisofaspecific
dimensionofafirm’sCSRstrategyanditsimpactonequilibriumprices,profits
and/orwelfare.However,thedefinitionofCSRpracticesvariesfromonemodelto
another,withoutexplicitlydecomposingCSRstrategiesintomultipledimensions
suchasforinstanceenvironement,humanresourcesandbusinessbehaviors.Our
contributiontothetheoreticalliteratureonthelinksbetweenstrategicCSRand

4

firmperformanceisthustwofold.Ononehand,weproposeamodelwhereCSR
decisionsaremadeover
n
"
2dimensions,whichenrichesexistingapproachesoften
focusingononeparticulardimensionofafirm’sCSRpolicy.ByformalizingCSR
investmentsovermultipledimensionsourmodelmaythereforebeconsideredas
complementarytotheseapproaches.AspointedoutbyBenabouandTirole(2010),
thedi
!
erentdimensionsofCSRneedtobeconsidered,sincefirmscandowellin
somedimensionsandpoorlyonothers.Onanotherhand,thesecondoriginality
ofourmodelistoconsiderexplicitlytheimpactofratingsintheCSRdecision
processandallowanalyzing,withinasimplepartialequilibriummodel,theimpact
ofextra-financialratingsonCSRdecisionsandexpectedprofits.
Thereisaconsiderable
empiricalliterature
ontheimpactofstrategicCSR
decisionsonfirmperformance.However,thereisnoconsensusonthelinkbetween
CSRandfirmperformanceandontheempiricalvalidityofthe‘Porterhypothesis’
(forasurveyseee.g.Baronetal.2008;Margolisetal.2007;Forget,2010).Re-
centresearchpointsatnumerousbiasesandproblemsofpreviouswork(eg:Elsayed
andPaton,2005orMcWilliamsandSiegel,2000)amongwhich:modelmisspecifi-
cation(endogeneity),omittedvariablesinthedeterminantsofprofitability,limited
data(smallsamples,oldperiods),cross-sectionalanalysisinvalidinthepresenceof
significantfirmheterogeneity,problemsofmeasurementofCSR,widediversityof
measuresusedtoassessfinancialperformance.Anotherproblemalsoliesinthedi-
rectionandmechanismsofcausation.Whethercorporatesocialresponsibilitywould
lead(ornot)tosuperiorfirmperformance,orwhetherfinancialperformancewould
ratherbeanecessaryconditionforcorporatesocialresponsibilityisstillamajor
staketobeinvestigated.
Inthispaper,weconsiderthattheabsenceofconsensusonthelinksbetween
corporatesocialresponsibility-andintangibleassetsingeneral-andfirmperfor-
mancesuggeststhatitshouldbeaspecificcombinationoffirmpoliciesthatwould
likelyleadtosuperiorcorporateperformance.Duringthe1990s,thiscomplemen-
taritybetweendi
!
erentmanagerialpracticeshasprovenausefulexplanationof
theSolowparadox,whereby“youcanseethecomputerageeverywherebutinthe
productivitystatistics”(Solow,1987).Indeed,severalresearchershaveshownthat
onlythosefirmsthathaveadoptedbothcomputerizationandcomplementaryin-
novativehumanresourcesmanagementpractices(teamwork,multi-tasking,quality
circles,etc.)didenjoysuperiorperformance(seee.g.IchniowskiandShaw2003;
BoucekkineandCrifo,2008).Byanalogy,theapparentlyambiguouslinkbetween
CSRandfirmperformancecouldpresumablybeexplainedbytakingintoaccount
thecomplementaritybetweenthemulti-dimensionalfacetsofcorporatesocialre-
sponsibility.
OurcontributiontotheempiricalliteratureonthelinksbetweenstrategicCSR
investmentsandfirmperformanceistwofold.Ontheonehand,byexploitingthe
temporaldimensionofourdatabasethroughtheSystemGMM(GeneralizedMethod
ofMoments)technique(seeBlundellandBond,1998),webetteraccountforthe
dynamicsoftheCSR-firmperformancerelationship.Ontheotherhand,wealso
proposeanexplicittestofthecomplementaritybetweenthedi
!
erentdimensions

5

ofCSRstrategies.WearethereforeabletodeterminewhichcombinationofCSR
practicesismostlikelytoimprovefirmperformance.
SeveralpapershavealreadyaddressedthedynamicsoftheCSR-firmperfor-
mancerelationship.Forinstance,PatonandElsayed(2005)proposeanestimation
ofthelinksbetweenCSRandperformancerelyingondynamicestimationtech-
niques.However,theydonotanalyzehowthecomplementaritybetweenthedif-
ferentdimensionsofCSRactivitiesa
!
ectsthisrelationship.Similarly,Baronetal.
(2008)providesanempiricaltestofapositivetheoryofcorporatesocialperformance
(CSP)anditsrelationtocorporatefirmperformance(CFP)andtosocialpressure.
TheyshownotablythatgreaterCSPresultsineconomicallyandstatisticallysig-
nificantbetterCFP,andsocialpressurereducesCFP.Thisapproachprovidesa
comprehensiveanalysisoftherelationsamongCFP,CSP,andsocialperformance.
Inparticular,inanoriginalandinnovativeempiricalstrategy,CSPisdisaggregated
intostrategiccomponentslikelytoincreaserevenueorproductivitydirectlyand
componentslikelytobearesponsetosocialpressure.Ourpaperexploresadi
!
er-
entbutcomplementarylinkbetweenCSRandperformance.Infact,wefocuson
thecomplementaritybetweenthemutlipledimensionsofafirm’sCSRpolicy,and
analyzeitsimpactonfirmperformance.

3TheTheoreticalModel

3.1BasicSet-Up

Theeconomyiscomposedofacontinuumofmassoneofrisk-neutralshareholders
andacontinuumofmassoneofrisk-aversemanagers.Managersarerandomly
matchedone-to-onewithshareholdersinaprincipal-agentrelationshipwithmoral
hazard(imperfectobservabilityofthemanager’se
!
ort).ShareholdersdelegateCSR
activitiestomanagersandthefirm’sCSRtasksareevaluatedexogenouslybyan
extra-financialratingagency.Theratingoftheextra-financialagencyisexogenous
andpubliclyobservedbybothpartiesbeforee
!
ortdecisionsaremade.Afirm’s
overallCSRstrategyisdefinedasfollows.
Definition1.
Corporatesocialresponsibilityhasseveraldimensions,comprising:

nAnEivrnoemtnlaoCpmnonet•Thisdimensionreferstotheincorporationofenvironmentalconsiderationsintothe
design,manufacturinganddistributionofproducts:pollutionpreventionandcontrol,
protectionofwaterresources,biodiversity,wastemanagement,managementoflocal
pollution,managementofenvironmentalimpactsfromtransportationetc.

6

AuHamneRosruecso(roSicla)oCpmnonet•Thisdimensionreferstoresponsiblehumanresourcesmanagement(trainingand
careerdevelopment,employeeparticipation,qualityofworkingconditionsetc.)and
mayincludeaswellcontributionstolocalandgeneralinterestcauses,respectfor
humanrights,eliminationofchildlabor.

reancneoCpmnonet•
ABusinessBehaviorsandGov
Thisdimensionreferstothefirms’practicestowardscustomersandsuppliers(pre-
ventionofconflictsofinterest,corruptionoranti-competitivepractices
4
,product
safety,informationtoconsumers,integrationofCSRinthesupplychainetc.)and
shareholders(shareholders’rights,promotionofindependentandcompetentadmin-
istratorsandauditors,transparencyofcompensationpolicyofkeyexecutives.)

DecomposingCSRinto
n
"
2dimensionsisconsistentwithandcomplementaryto
existingapproaches,eithertheoreticalandfocusingononebroaddimensionofCSR
atthefirmlevel
5
,orempiricalandcapturingdi
!
erentcriteriaofCSRstrategies
6

Theproductionprocessconsistsof
n
CSRtasks,whicharedelegatedbyshareholders
(whoownproduction)tomanagers.Thisassumptionisconsistentwithshareholders’
supportforexplicitstakeholderprotectionleadingthemtoendorseexplicitCSR
measurespossiblybecausetheyfearcostlyboycotts(seeCespaandCestone(2007).
Themanager’se
!
ortisimperfectlyobservableandshareholdershavetodesigna
contractthathelpssolvingthemoralhazardproblem.
7
Theincentivesstructureof
themodelcorrespondstothelinear-exponential-normal(LEN)multi-tasksagency
frameworkfirstdevelopedbyHolmstromandMilgrom(1987,1991)wheremanagers
haveanegativeexponentialutility(seee.g.Itoh,1994orFelthamandXie,1994).
8
4
SuchpracticesareforinstanceencouragedbyinternationalorganizationssuchastheUnited
Nations,OECDorWorldTradeOrganization.
5
Forinstance,thefirm’sCSRpolicymaybeformalizedasaproductdi
!
erentiationstrategy(see
e.g.Gra
!
ZivinandSmall,2005orBaron2007,2008aandb)orasabroadernotionofstakeholder
protection(seeCespaandCestone,2007).OurdefinitionofCSRthereforecomplementssuchtypes
ofapproaches.
6
Forinstance,intheirmeta-analysisof167studiesonthelinksbetweenCSRandfirmperfor-
mance,Margolis,ElfenbeinandWalsh(2007)considerninecategoriesofCSRstrategies:Char-
itablecontributions,Corporatepolicies,Environmentalperformance,Revealedmisdeeds,Trans-
parency,andfourothercategoriesreflectingdi
!
erentwaysresearchersattempttocapturefirms
CSR(Self-reportedsocialperformance,Observers’perceptions,Third-partyauditsandScreened
mutualfunds).Ourapproachisconsistentwithsuchtypeofstudies,asweconsiderseveralcate-
goriesofCSRtasksinourtheoreticalandempiricalanalysis.
7
Theconflictofinterestsbetweenshareholdersandmanagersreliesonthemoralhazardissue
associatedwithimperfectobservabilityofmanagerialCSRe
!
orts.Inaveryinterestinganalysis,
CespaandCestone(2007)formalizeanotherdeterminantofthisconflictofinterests,relyingon
managerialentrenchmentconsiderations.Ourapproachdi
!
ersfromCespaandCestone’smodel
becausewedonotformalizesocialactivists’interestforCSRissues.
8
Thismodelhasbeenextensivelyusedtoanalyzemulti-tasksagencyrelationshipsunderthe
assumptionofconstantabsoluteriskaversion.

7

Moreprecisely,ourmodelextendsItoh(1994)’sframeworkwith
n
e
!
ortlevels(or
tasks).

Theobservableoutput
oftherelationshipbetweentheshareholderandtheman-
agerisgivenby:
ny
=
.e
i
+
!
(1)
!1=iwhere
e
i
representsunobservablee
!
ortatCSRtask
i
and
!
isanerrorterm(random
noisecapturingimperfectobservabilityofe
!
ort)normallydistributedwithmean
zeroandvariance
"
2
>
0.
9
Theshareholderisriskneutralandthemanagerisriskaversewithpreferencesrep-
resentedbytheexponentialutilityfunctionasfollows:foranymanagerialincome
#
(paymentreceivedminuscostofe
!
ort)themanager’sutilityfunctionis:
u
(
#
)=
#
exp(
#
r
#
)where
r>
0isthecoe
"
cientofabsoluteriskaversion.Reser-
vationwagesareassumedtobezero.
Themanager’sexpectednetwage
,
#
and
theshareholder’sexpectedprof-
its
,
E
(
B
)write:

#
=
E
(
w
)
#
C
(
e
1
,..,e
n
)(2)
E
(
B
)=
E
(
y
)
#
E
(
w
)(3)
where
C
(
e
1
,..,e
n
)isthemanager’scostofe
!
ortsandtheexpectedwage
E
(
w
)is
linearintheobservableperformancemeasure:
E
(
w
)=
$
E
(
y
)+
%
(4)
with
$
thevariablepart(’piecerate’)and
%
thefixedpartofthecompensationto
bedeterminedbytheshareholdersuchthatthemaximume
!
ortlevelsarechosen
bythemanagerinequilibrium.
IntheLENmulti-taskmodel,
themanager’scertaintyequivalent
andthe
joint
surplus(incertaintyequivalent)
aregivenby
CE
m
=
$
e
i
+
%
#
C
(
e
1
,..,e
n
)
#
(5)
!
n
r
$
2
"
2
21=iCE
js
=
e
i
#
C
(
e
1
,..,e
n
)
#
(6)
!
n
r
$
2
"
2
21=iwhere
r
!
2
"
2
istheriskpremium.
10
29
Thedelegationofproductivee
!
orts(independentlyofanyCSRdimension)couldalsobe
analyzed(forinstanceinourbenchmarkcasewith
n
tasks),butwerestrictouranalysistoCSR
tasksinordertoremainascloseaspossibletothevariablesofourdatabaseintheeconometric
analysis.
10
ForageneraldemonstrationofthecertaintyequivalentseeMilgromandRoberts(1992).

8

Theequilibriumcontract
isdeterminedbytheshareholderbyanticipatingthat
themanager’se
!
ortlevelswillbechosensoastomaximizethemanager’scertainty
equivalent.Itisthusdeterminedinthreesteps:

Step1-Incentivecompatibleconstraint
:
$
suchthat
e
i
=argmax
CE
m
,
$
i
=1
..n

Step2-Participationconstraint
:
%
suchthat
CE
m
=0

Step3-Optimalcontract
:(
e
1
,..,e
n
)=argmax
E
(
B
)
Thedi
!
erentCSRtasksmayberelativecomplements(orsubstitutes)fromthe
manager’sperspective,thatisintermsofmanageriale
!
ortcost.Wenowthus
definecostcomplementaritybetweentheCSRtasks.

3.2PairwiseCostComplementaritybetweentheCSRTasks

AgroupofCSRtasksiscomplementaryifdoingmoreofanysubsetofthemincreases
thereturnsfromdoingmoreofanysubsetoftheremainingtasks,inotherwords
when’thewholeismorethanthesumofitsparts’.
Werestrictouranalysisto
n
=3
CSRtasks
(inaccordancewithdefinition1)
toobtainanalyticalresultsinvariouscasesofcomplementarityandsubstitutability
betweentheCSRtasks.Thecomplementaritybetweenthedi
!
erentCSRdimensions
isdefinedasfollows.

Definition2.CostcomplementaritybetweenCSRpractices.
Giventhe
extra-financialratings,twoCSRpracticesarerelativecomplementswhenthecostof
e
!
ortinoneCSRtaskdecreaseswhenanotherCSRtaskisimplemented.
RelativecomplementaritybetweentheCSRtasksa
!
ectsthemanager’scostofe
!
ort
C
(
e
1
,e
2
,e
3
)asfollows.Theratingoftheextra-financialagencyisexogenousand
publiclyobservedbeforee
!
ortdecisionsaremade.Let
µ
denotetheimpactof
extra-financialratingsonthecostofe
!
ort(therebycapturingthedegreeofcost
complementarity)with0
<µ<
1.
Themanager’scostofe
!
ortthenisdefinedby:
31C
(
e
1
,e
2
,e
3
)=
.c.e
i
2
#
c.µ.
&
(
e
1
,e
2
,e
3
)(7)
!21=iwhere
c>
0,0
<µ<
1reflectsthedegreeofpairwisecostcomplementarityand
&
(
e
1
,e
2
,e
3
)capturesthecrosse
!
ectsbetweentasks.
Whentherearemorethantwodimensions,animportantresultfromthetheoryof
supermodularitystatesthatafunctionissupermodularoverasubsetofitsargu-
mentifandonlyifallpairwisecomponentsinthesubsetarecomplementary.In
otherwordswhentherearemorethantwodimensionsitsu
"
cestocheckpairwise
complementarities(seeMohnenandRoller(2005),orTopkis(1978)).Wethushave
thefollowingdefinition.

9

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