Lorenzo Sacconi

A Social Contract Account for CSR as an Extended Model of Corporate Governance (I): Rational Bargaining and Justification

This paper is the first part of a two parts essay aimed at giving a contractarian foundation to the concept of Corporate Social Responsibility (CSR) meant as an extended model of corporate governance of the firm. I fist present the heuristics of the scientific program meant to theorizing over an institution like a system of corporate governance, which is partitioned in two domains, the justification domain and the compliance domain. Bargaining theory, reputation game and reciprocity theories, as distinct pieces of game theory, are the main theoretical tools employed in developing the answer to the relevant questions in the two domains respectively. The first part focuses over justification according to the contractarian point of view. At start, a definition of CSR as an extended model of corporate governance, based on the fiduciary duties owed to all the firms stakeholders, is given. Then, by setting the basic context of incompleteness of contracts and abuse of authority, I analyze how the extended view of corporate governance directly arises form within the criticism of contemporary neo-institutional economic theory of the firm. Hence, from an application of the theory of bargaining games, the structure of a multi-stakeholder firm based on the constitutional contract theory is deduced, which satisfies the basic requirements of a justification in the contractarian approach. This is a sequential model of constitutional choice, where at the first step a constitution is chosen and then a post-constitutional coalition game is played. Both the games are solved in terms of the proper cooperative bargaining and coalition game solution concept, and results are interpreted not only according to the perspective of the theory of rational bargaining, but also as an impartial solution, starting form a fair status quo and corresponding to reasonable intuitions on distributive justice. On these basis the inquiry for a prescriptive theory of governance and strategic management - able to overcome the criticism raised against the lack of determination and unicity of a multi-stakeholder model of corporate governance and strategy - is answered, so that I am able to define an objective function for the firm consistent with the idea of CSR as a model of governance. At last, the paper tells the contractarian story, which can be taken as a potential explanation of the firm, of how the multi-fiduciary corporation may emerge from the first and the second social contract, as a firm endowed with the typical structure of control, but constrained by CSR obligations that those who in the firm hold a position of authority owe to all the non controlling stakeholders.

A Social Contract Account for CSR as an Extended Model of Corporate Governance (II): Compliance, Reputation and Reciprocity

This essay seeks to give a contractarian foundation to the concept of Corporate Social Responsibility (CSR), meant as an extended model of corporate governance of the firm. Whereas, justificatory issues have been discussed in a related paper (Sacconi, L.: 2006b, this journal), in this essay I focus on the implementation of and compliance with this normative model. The theory of reputation games, with reference to the basic game of trust, is introduced in order to make sense of self-regulation as a way to implement the social contract on the multi-fiduciary model of corporate governance. This affords understanding of why self-regulation, meant as mere recourse to a long-run strategy in a repeated trust game, fails. Two basic problems for the functioning of the reputation mechanism are examined: the cognitive fragility problem, and the motivational problem. As regards the cognitive fragilities of reputation (which result from the impact of unforeseen contingencies and from bounded rationality), the paper develops the logic and the structure that self-regulatory norms must satisfy if they are to serve as gap-filling tools with which to remedy cognitive limitations in the reputation mechanism. The motivation problem then arises from the possibility of sophisticated abuse by the firm. Developed in this case is an entirely new application of the theory of conformism-and-reciprocity-based preferences, the result of which is that the stakeholders refuse to acquiesce to sophisticated abuse on the part of the firm.

Conformity, Reciprocity and the Sense of Justice how Social Contract-Based Preferences and Beliefs Explain Norm Compliance: The Experimental Evidence

Compliance with a social norm is a matter of self-enforceability and endogenous motivation to conform which is relevant not just to social norms but also to a wide array of institutions. Here we consider endogenous mechanisms that become effective once the game description has been enriched with pre-play communication allowing impartial agreements on a norm (even if they remain not binding in any sense). Behavioral models understand conformity as the maximization of some “enlarged” utility function properly defined to make room for the individual’s “desire” to comply with a norm reciprocally adhered to by other participants—whose conformity in turn depends on the expectation that the norm will be in fact reciprocally adhered to. In particular this paper presents an experimental study on the “conformity-with-the-ideal preference theory” (Grimalda and Sacconi in Const Polit Econ 16(3):249–276, 2005), based on a simple experimental three person game called the “exclusion game”. If the players participate in a “constitutional stage” (under a veil of ignorance) in which they decide the rule of division unanimously, the experimental data show a dramatic change in the participants’ behavior pattern. Most of them conform to the fair rule of division to which they have agreed in a pre-play communication stage, whereas in the absence of this agreement they behave more egoistically. The paper also argues that this behavior is largely consistent with what Rawls (A theory of justice, Oxford University Press, Oxford, 1971) called the “sense of justice”, a theory of norm compliance unfortunately overlooked by economists and which should be reconsidered after the behaviorist turn in economics.

A Theoretical Analysis of the Relationship between Social Capital and Corporate Social Responsibility: Concepts and Definitions

Trust, trustworthiness and ethical norms of reciprocity and cooperation have been receiving more and more attention in economic analysis. In particular, two concepts have been widely used in order to study the socio-economic effects of these factors: the concept of social capital (hereafter also SC) and of corporate social responsibility (hereafter also CSR). Even though SC and CSR seem to be linked by many common elements related to the quality and quantity of social relations between agents, their relationship has not been deeply investigated yet. This paper is aimed at shedding light on some aspects of this relationship, in particular, by investigating the idea of a virtuous circle, between the level of SC and the implementation of CSR practices, that fosters socio-economic development by generating social inclusion and social networks based on trust and trustworthiness. Following the literature on SC that stresses its multidimensional character (e.g. Paldam 2000), we consider two dimensions of this notion. Starting from the distinction introduced by Uphoff (1999), we take into account a cognitive and a structural idea of SC. The first one essentially refers to the dispositional characters of agents that affect their propensity to behave in different ways. The latter refers to social networks connecting agents. With regard to the concept of CSR, we adopt a contractarian approach and consider CSR as an extended model of corporate governance, based on the fiduciary duties owed to all the firms stakeholders. Among stakeholders, we distinguish between strong and weak stakeholders. Both these two categories have made specific investments in the firm. However, strong stakeholders are precious for the firm because they bring in strategic assets. They are, for example, skilled workers or institutional investors. On the contrary, weak stakeholders do not bring strategic assets into the firm and firms have material incentives at defecting in the relationship with them. They are, for example, unskilled workers. Considering the notions of cognitive and structural SC and a contractarian approach to CSR, we show that: a) the level of cognitive SC plays a key role in inducing the firm to adopt and observe CSR practices that respect all the stakeholders; b) the decision of adopting formal instruments of CSR contributes to create cognitive SC that is endogenously determined in the model; c) the level of cognitive SC and the decision of adopting CSR practices creates structural SC in terms of a long term relationship between the firm and the weak and strong stakeholders.

The Economics of Corporate Social Responsibility

This paper critically considers ‘additional’ and ‘instrumental’ explanations that economists have recently suggested in order to reduce the understanding of CSR within the limits of standard economic theorizing, and contrasts them with a ‘constitutive’ definition as an extended model of corporate governance. Then critically reviews the new institutional economics literature that, although it may not be normally related to CSR, is much more useful than standard microeconomic theorizing for the purposes of gaining deep understanding of CSR. Therefore it is suggested that economists should draw from it in order to understand why fiduciary duties must be expanded even for mere economic reasons of efficiency, and also why corporate reputation cannot leave aside the explicit settlement of an ethical norm of CSR. On these basis, the paper presents a full-fledged social contract theory of multi-stakeholder corporate governance, which entails multiple fiduciary duties and a fair distribution of corporate surpluses and provide and offer an explanation of CSR as a self-enforceable social norm based on the Binmore-Rawls theory of the social contract that underpins multi-stakeholder institutions of corporate governance. Then the paper replies to the main criticisms leveled against the stakeholder model of corporate governance, while at the same time developing analytically the model’s foundation.

A Rawlsian View of CSR and the Game Theory of its Implementation (Part II): Fairness and Equilibrium

This is the second part of an comprehensive essay of the Rawlsian view of corporate social responsibility (CSR thereafter) understood as an extended model of corporate governance and objective function, based on the extension of fiduciary duties owed to the sole owner of the firm to all the company stakeholder (for this definition see part I, Sacconi, 2010a, infra). As in the first part, CSR is also understood as a self-sustaining institution - i.e. as a self-sustaining system of descriptive and normative beliefs consistent with the equilibrium behaviors performed repeatedly by agents in the domain of action of corporate governance (firms and their stakeholders). But equilibria are multiple in the game representing the strategic interaction among the firm and its stakeholders - modeled as a repeated trust game or some similar ‘social dilemma game’ (Ostrom, 1990). Thus asserting that CSR satisfies the Nash equilibrium condition as an institution is not enough. There is also an equilibrium selection problem. This the place where the Rawlsian social contract (Rawls, 1971, 1993) enters again the picture by performing its main role as normative equilibrium selection device from the ex ante perspective: that is, the ex ante impartial selection of a unique equilibrium amongst the many possible in the repeated trust game involving the firms and its stakeholders. Note that this was its second role previously suggested (see section 5 part I, and left to this part where it is treated at length), as distinguished from the role of shaping the players’ expectations so that in the ex post perspective they are able to predict the agreed solution as the result of a cognitive process of beliefs convergence to the equilibrium, which is focused on in part III, (see Sacconi, 2011 and Sacconi 2008).

A Rawlsian View of CSR and the Game Theory of its Implementation (Part I): The Multistakeholder Model of Corporate Governance

This is the first part of a comprehensive essay on the Rawlsian view of corporate social responsibility (in short, CSR). CSR is defined as a multi-stakeholder model of corporate governance and objective function based on the extension of fiduciary duties towards all of the firm’s stakeholders (see section 2). A rationale for this idea is given firstly within the perspective of new institutional economic theory in terms of transaction costs efficiency. From this perspective, abuse of authority in regard to the non-controlling stakeholders emerges as the main unsolved problem, and makes it impossible to sever efficiency from equity within the domain of corporate governance (section 3). Intuitively, a Rawlsian principle of redress emerges as the natural answer to the legitimization problem of ownership and control rights allocations when, in order to provide incentives to one party (the incentive to undertake important specific investments), they give it a disproportionate advantage over other non-controlling stakeholders.

The Q-RES Project: The Quality of Social and Ethical Responsibility of Corporations

The present guidelines are the results of the first year of research of the “Q-RES Project: Towards a Quality standard for the Social and Ethical Responsibility (RES) of corporations”.

Modeling Cognitive Social Capital and Corporate Social Responsibility (CSR) as Preconditions for Sustainable Networks of Relations

The paper studies the relationship between social capital (SC) and Corporate Social Responsibility (CSR) by investigating the idea of a virtuous circle between the level of SC and the implementation of CSR standard of behaviour that favours the creation of cooperative networks between the firm and all its stakeholders by promoting the spread of social norms of trust and cooperation. Multidimensionality of social capital (Uphoff 1999, Paldam 2000) is accounted in terms of cognitive and structural SC. The first refers to dispositional characters of agents that affect their propensity to behave in conformity with social norms, whereas the latter consists of social networks connecting agents. With regard to the concept of CSR, we adopt a contractarian approach and consider CSR as an extended model of corporate governance, based on fiduciary duties owed to all the firms stakeholders. Among stakeholders, we distinguish between strong and weak stakeholders. Both of them are locked into a relation with the firm by specific investments. While, however, cooperation with strong stakeholders is a long run equilibrium for the firm, on the contrary, in the relations with weak stakeholders the firm face material incentives to defect from cooperation with them. By joint use of the tools of network analysis and psychological game theory, the paper shows the role of cognitive SC and CSR in promoting the emergence of cooperative networks between the firm and all its stakeholders (structural SC). In particular, (a) the level of cognitive SC, in terms of community or society-wide disposition to comply with fair social norms, plays a key role in providing opportunities for the firm to agree (with strong stakeholders) on CSR principles and hence to induce incentives to comply with them. (b) The explicit agreement on CSR principles and norms engenders cognitive social capital on its own. It does so by creating room for conformist preferences that exploit beliefs of mutual conformity and dispositions to conform. Moreover, the agreement on CSR principles by itself positively affects beliefs about reciprocal conformity on the part of the firm and its strong stakeholders. (c) The level of cognitive social capital (both beliefs and dispositions) and the decision to adopt CSR principles generate structural social capital understood as long-term cooperative relationships between the firm and its stakeholders, even though, on considering the material payoffs characterizing the single relationships, the firm would have no incentive to cooperate with weak stakeholders. Alongside the notion of sub game prefect equilibria and credible threats, we show that strong stakeholders endowed with high cognitive social capital, have an incentive in punishing the firm if it is not cooperative with weak stakeholders. The sanction may induce the firm to cooperate with weak stakeholders as well, and it generates cooperative networks that would not be sustainable without the power of the sanction.

Social Capital, Corporate Social Responsibility, Economic Behaviour and Performance

Introduction Lorenzo Sacconi and Giacomo Degli Antoni PART I: NEW PERSPECTIVES ON THEECONOMIC THEORY OF INSTITUTIONS, INDIVIDUAL PREFERENCES AND SOCIAL NORMS A Plea for Unconventional Economics Bruno S. Fey A Rawlsian View of CSR and the Game Theory of its Implementation (III): Conformism, Equilibrium Refinement and Selection Lorenzo Sacconi Trustful Banking: A Psychological Game-Theoretical Model of Fiduciary Interactions in Micro-credit Programs Vittorio Pelligra The Relationship Between Competition and Trust: An Essay in an Historical and Theoretical Perspective Sergio Beraldo and Gilberto Turati PART II: SOCIAL CAPITAL AND CORPORATE SOCIAL RESPONSIBILITY: A GAME THEORETICAL AND NETWORK ANALYSIS APPROACH Linking Economic and Social-Exchange Games: From the Community Norm to CSR Masahiko Aoki Social Capital in Networks of Relations Steffen Lippert Modeling Cognitive Social Capital and Corporate Social Responsibility as Preconditions for Sustainable Networks of Relations Giacomo Degli Antoni and Lorenzo Sacconi PART III: THE EOCNOMIC EFFECT OF SOCIAL CAPITAL AND OTHER REGARDING PREFERENCES: EXPERIMENTAL AND EMPIRICAL EVIDENCE Social Distance, Cooperation and Other-regarding Preferences: A New Approach Based on the Theory of Relational Goods Leonardo Becchetti, Giacomo Degli Antoni and Marco Faillo Generalized Trust: An Experimental Perspective Gianluca Grimalda and Luigi Mittone Testing the Distributive Effects of Social Enterprises: The Case of Italy Carlo Borzaga, Sara Depedri and Ermanno Tortia PART IV: SOCIAL CAPITAL AND SUSTAINABLE ECONOMIC DEVELOPMENT: THE MACRO APPROACH Social Assets, Technical Progress and Long-Run Welfare Stefano Bartolini and Luigi Bonatti Generalized Trust: The Macro Perspective Martin Paldam The Local Path to Sustainable Development: Social Capital in Naples Raffaella Nanetti, Robert Leonardi and Catalina Holguin