Contract Duration and Socially Responsible Investment
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.
Socially responsible investment; ESG; Multitask; Hold-up; Incomplete contracts; Social impact bonds; Sustainability-linked bonds
D86, G11, G23, M12, M14
NoteA revised version of this paper is available from this link
School of Economics, Finance, and Marketing
Junior Research Fellow, Research Institute for Economics & Business Administration, Kobe University