Universität Bonn

Department of Economics

Philip Bond - University of Washington

“A Panacea for Market Power?”, together with Doron Levitz

Abstract

We study the equilibrium effects of the “S” dimension of ESG in a model of imperfect competition in labor (and product) markets. All else equal, a profit maximizing firm can benefit from adopting ESG policies that give a competitive edge in attracting workers; “Doing Well by Doing Good” applies in our setting. ESG policies are strategic complements, and in equilibrium, they are adopted by all firms resulting with higher worker welfare but lower shareholder value. Thus, profit maximizing firms benefit from coordinating on low impact ESG policies, raising anti-trust concerns from the adoption of industry-wide ESG standards. A purposeful firm (lead by a socially conscious board) benefits from such ESG policies, and imperfect competition between purposeful firms obtains the first best in equilibrium. Thus, the social purpose of the corporation is a panacea to excessive marker power. More broadly, our analysis relates the adoption of ESG policies to the nature of competition between firms and their model of corporate governance.

Additional information: