Heterogeneous Firms and CSR Sorting

"We present a theoretical model of CSR choice in an economy where heterogeneous firms display productivity differences. We analyze the problem of each firm’s choice of both pursuing ethical standards in production and deciding upon the intensity of CSR embodied in the good produced. The behavior of firms follows from consumers’ demand for CSR goods, given that the latter derive additional utility from ethical contents of the goods and so present a demand in which sensitiveness to CSR is relevant. The core elements of the model are based on the strand of literature on heterogeneous firms in international trade pioneered by Mélitz (2003). Here we consider a closed economy and the CSR option in production, which is subject to both sunk and variable costs. We analyze the link between heterogeneity in productivity and CSR intensity, letting the level of ethical standards to be endogenously determined by each firm. As the cost structure varies according to the CSR intensity, firms that differ in productivity optimally adopt different strategies of CSR differentiation."