Firms’ Social Impact: Balancing Profits and Externalities

forthcoming

Firms conFirms contribute to society not only through profit-oriented activities such as innovation and job creation, but also by engaging in “altruistic” behavior by prioritizing broader social objectives, such as reducing pollution, improving labor conditions, and other pressing social issues. While economic theory suggests that externalities can be addressed through government interventions like taxes or property rights, incomplete information or political challenges often hamper these approaches. As a result, stakeholders must negotiate with firms, playing a key role in determining their social impact. Despite the importance of these negotiations, we know little about what drives them or how they influence a firm’s objectives. BALANCE breaks new ground both theoretically and empirically to assess how firms impact society and the underlying mechanisms. BALANCE’s overarching goal is achieved through four interrelated projects, each addressing distinct frictions that hinder stakeholders from demanding change. Project 1 examines prosocial banks, revealing how their entry affects borrowers’ productivity and long-term local economic growth. Project 2 examines how competition interacts with social impact—either differentiating a firm’s products or reducing its profit margins. Project 3 tackles information frictions in financial markets, where shareholders often lack awareness of whether others share their views on a firm’s green stance, potentially undermining coordinated efforts. Project 4 investigates information asymmetries in global value chains, where competitive pressures and opaque green certifications can lead to biodiversity loss. By integrating industrial organization and trade models with insights from finance and strategy, BALANCE pushes the research frontier while offering new policy tools. As public and private institutions tie financial support to sustainability, understanding how firms internalize their impacts on society is vital to fostering change.