The Role of Consumers

By Andreas Fransius, Peace Is Profitable Contributor

While cost-cutting is an important imperative for firms, it is equally important to consider another motivation for responsible practices, namely how firms can reach new consumers. In fact, customers are often willing to pay a premium for products that have been produced in accordance with their values, for instance by respecting the environment and paying fair wages to employees. Such factors are often emphasized in the emerging academic literature on corporate social responsibility, CSR.

A number of academics have recently tried to analyze CSR from an academic standpoint. Notably, Markus Kitzmueller at the World Bank and Professor Jay Shimshack of Tulane University recently published an extensive article on “Economic Perspectives on Corporate Social Responsibility”, which can be accessed here. Professor Nancy Folbre of the University of Massachusetts, Amherst, is another frequent contributor to this discussion.

These authors have struggled to find a statistically significant link between profits and social responsibility, which is hardly surprising given the complexity of such issues. Aside from the difficulty of defining what constitutes “responsible behavior” it is practically impossible to establish a causal link, as there are so many factors that affect profits. In statistical terms, there are both omitted variables and endogeneity problems. The end result is that no positive or negative link has been empirically demonstrated between social responsibility and financial performance.

These authors have, however, identified consumer preferences as a key driving force behind CSR and responsible business practices in general. Consumers play a role in two dimensions: by choosing which products and services they spend their money on, and by carrying out consumer boycotts and activist campaigns. In an international context, consumer pressures on one market can also affect practices in other nations, as Kitzmueller discusses on his blog.

By offering products that have been produced in a socially responsible way, firms can effectively increase consumer choice and improve the ability of customers to reward products that correspond to their values. At the same time, by carrying out campaigns, customers can proactively affect the product offering before it reaches the market. By operating in these two dimensions, consumers are a key driving force for making peace profitable.