Strategic CSR, heterogeneous firms and credit constraints

We set out a model of strategic CSR with consumers' demand for CSR products, where ethical features improve the "quality" of goods through a complementarity between production and CSR provision. Our model builds on the literature based on heterogeneous firms in monopolistic competition with quality product differentiation. By letting the optimal level of ethical standards to be endogenously determined by each profit-maximizing firm, we analyse the link between heterogeneity in productivity and CSR intensity. The analytical results are confirmed by a numerical analysis. We then consider the need for external financing, finding that credit constraints may lead active firms to reduce the optimal CSR level whereas the reputational effect of CSR firms may help in dampening the reduction in firms' optimal CSR level. Finally, we find that policy interventions may lead to a higher level of the optimal CSR, when addressed to change firms' incentives and consumers' ethical awareness.