RIEB Discussion Paper Series No.2021-14

RIEB Discussion Paper Series No.2021-14


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

JEL Classification

D86, G11, G23, M12, M14


A revised version of this paper is available from this link


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.