RIEB Discussion Paper Series No.2021-14

Title

Contract Duration and Socially Responsible Investment

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

JEL Classification

D86, G11, G23, M12, M14

Note

A revised version of this paper is available from this link

Inquiries

Meg ADACHI-SATO
School of Economics, Finance, and Marketing
RMIT University
Junior Research Fellow, Research Institute for Economics & Business Administration, Kobe University
E-mail: meg.sato@rmit.edu.au.