Socially Responsible Investment: Ex-ante Contracting or Ex-post Bargaining?
This paper shows how a socially and environmentally aware firm principal can motivate a profit-oriented manager to pursue positive environmental, social, and governance (ESG) outcomes. In the model, the manager produces a verifiable output that is detrimental to ESG but also engages in an unverifiable output that promotes ESG. I show that an ex-post bargaining contract is preferred to an ex-ante commitment contract if the unverifiable output substantially improves ESG or if there is a large negative externality. The paper also demonstrates how social impact bonds can be more effective than short-term debt when used to finance social programs.
Socially responsible investment; ESG; Multitask; Holdup; Incomplete contracts; Social impact bonds
D86, G11, G23, M12, M14
The original version is RIEB Discussion Paper Series No.2021-14
Junior Research Fellow, Research Institute for Economics & Business Administration, Kobe University
Faculty of Business Administration and Accountancy, Khon Kaen University