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Contract Duration and Socially Responsible Investment

Meg Adachi-Sato
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Meg Adachi-Sato: School of Economics, Finance, and Marketing RMIT University, AUSTRALIA and Research Institute for Economics and Business Administration, Kobe University, JAPAN

No DP2021-14, Discussion Paper Series from Research Institute for Economics & Business Administration, Kobe University

Abstract: This paper shows how a socially and environmentally aware firm principal can motivate a profit-oriented manager to pursue environmental, social and governance (ESG) outcomes by adjusting the length and timing of wage contracts. In the model, the manager produces a verifiable output that is detrimental to ESG, but also engages in an unverifiable output that reduces ESG costs. The optimal arrangements are a short-term contract if the unverifiable output reduces ESG costs, and a long-term contract if it does not. The paper also demon-strates how social impact bonds can be more effective than short-term debt to finance social programs.

Keywords: Socially responsible investment; ESG; Multitask; Hold-up; Incomplete contracts; Social impact bonds; Sustainability-linked bonds (search for similar items in EconPapers)
JEL-codes: D86 G11 G23 M12 M14 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2021-05
New Economics Papers: this item is included in nep-cta, nep-env and nep-ore
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