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Corporate Provision of Public Goods

John Morgan and Justin Tumlinson ()
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Justin Tumlinson: Institute for Innovation and Entrepreneurship, Loughborough University, London E15 2GZ, United Kingdom; Institute for Strategy, Technology, and Organization, Ludwig-Maximilians-Universität Munich, 80539 Munich, Germany

Management Science, 2019, vol. 65, issue 10, 4489-4504

Abstract: Milton Friedman famously suggested that firms ought not divert profits toward public goods because shareholders can better make these contributions themselves. Despite this, activist shareholders are increasingly successful in persuading firms to be “socially responsible.” We study firm behavior when shareholders care about public goods as well as profits and when managerial contracts reflect these concerns. Under these ideal conditions, managers redirect more profits toward public goods than shareholders would when acting separately—shareholders are poorer but happier. Further, so long as the public good is sufficiently desirable, the manager selects the socially optimal level of output, despite the mismatch between shareholder preferences and those of society at large.

Keywords: public goods; corporate social responsibility; externalities (search for similar items in EconPapers)
Date: 2019
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