Working paper abstract

#2011-016

Voluntary agreements and community development as CSR in innovation strategies

Vivekananda Mukherjee & Shyama V. Ramani

The present paper examines how an innovating firm decides between two forms of voluntary agreements (VA) in a context, where a non-governmental organization (NGO) rather than a regulator watches over citizens' interests. The innovation generates profit and consumer surplus as well as environmental damage. Corporate social responsibility (CSR) within the innovation process is considered in terms of a redistribution of profit towards community development, with or without additional abatement efforts via a VA. Bargaining between firm and NGO yields the amount allocated to community development. The model demonstrates that the firm's choice of VA hinges on the tradeoffs between appropriating the full innovation profit and paying a higher lump sum towards community development or sacrificing some of the innovation profit by lowering innovation effort, but gaining in terms of paying a lesser amount towards community development. CSR with abatement is unlikely in the case of radical innovations. There is also a clear divergence of interests between the firm, the NGO and the State for some parameter configurations, which are duly identified.

Key words: Corporate social responsibility, voluntary agreements, community development donations, innovation

JEL code: M14, O32, O33