Corporate Profit Tax and Strategic Corporate Social Responsibility under Foreign Acquisition

Xu, Lili and Lee, Sang-Ho (2020): Corporate Profit Tax and Strategic Corporate Social Responsibility under Foreign Acquisition.

Abstract

This study investigates government public policies facing competing firms’ strategic corporate social responsibility (CSR) activities and finds that the choice of CSR crucially depends on corporate profit tax. We demonstrate that strategic CSR decreases while social welfare increases with corporate tax. When the government grants uniform output subsidies, we show that bilateral CSR leads to a lower CSR level than under unilateral CSR but bilateral CSR is always beneficial to society. However, when the government grants discriminatory output subsidies which yield different levels of unilateral CSR, we show that domestic CSR leads to a lower CSR level than under foreign CSR. In an endogenous CSR choice game, domestic CSR (no CSR) is a Nash equilibrium when corporate tax is low (high) under the uniform subsidy, while foreign CSR could be a Nash equilibrium when corporate tax is low under the discriminatory subsidy.

• Item Type: MPRA Paper
• Language: English
• Keywords: corporate profit tax; corporate social responsibility; endogenous CSR choice game
• Subjects: D - Microeconomics > D4 - Market Structure, Pricing, and Design > D43 - Oligopoly and Other Forms of Market Imperfection; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L21 - Business Objectives of the Firm

References

Aaronson, S. A., 2007. A match made in the corporate and public interest: marrying voluntary CSR initiatives and the WTO. Journal of World Trade. 41(3), 629-659.

Alley, W. A., 1997. Partial ownership arrangements and collusion in the automobile industry. Journal of Industrial Economics. 45(2), 191-205.

Barcena-Ruiz, J., Olaizola, N. 2007. Cost-saving production technologies and partial ownership. Economics Bulletin. 15(6), 1-8.

Benabou, R., Tirole, J., 2010. Individual and corporate social responsibility. Economica. 77(305), 1–19.

Bernard, A.B., Jensen, J. B., Redding, S.J., Schott P.K., 2018. Global firms. Journal of Economics. Lit. 56(2), 565-619.

Besley, T., Ghatak, M., 2005. Competition and incentives with motivated agents. American Economic Review. 95(3), 616-636.

Brand, B., Grothe, M., 2013. A note on ‘Corporate Social Responsibility and Marketing Channel Coordination’. Research in Economics. 67(4), 324-327.

Brand, B., Grothe, M., 2015. Social responsibility in a bilateral monopoly. Journal of Economics. 115(3), 275-289.

Brekke, K., Nyborg, K., 2008. Attracting responsible employees: Green production as labor market screening. Resource and Energy Economics. 30(4), 509-526.

Carroll, A., Shabana, K., 2010. The business case for corporate social responsibility: A review of concepts, research and practice. International Journal of Management Reviews. 12(1), 85-105.

Chang, Y.M., Chen, H.Y., Wang, L.F.S., Wu, S.J., 2014. Corporate social responsibility and international competition: A welfare analysis. Review of International Economics. 22(3), 625-638.

Choi, J.P., Furusawa, T. Ishikawa, J., 2020. Transfer pricing regulation and tax competition. Journal of International Economics. https://doi.org/10.1016/jinteco.2020.103367.

Crifo, P., Forget, V., 2015. The economics of corporate social responsibility: a firm-level perspective survey. Journal of Economics Surveys. 29(1), 112–130.

Fanti, L., Buccella, D., 2017. Corporate social responsibility in a game-theoretic context. Economia e Politica Industriale. 44(3), 371-390.

Garcia, A., Leal, M., Lee, S.H., 2018a. Social responsibility in a bilateral monopoly with R&D. Economics Bulletin. 38, 1467-1475.

Garcia, A., Leal, M., Lee, S.H., 2018b. Time-inconsistent environmental policies with a consumer-friendly firm: Tradable permits versus emission tax. International Review of Economics and Finance. 58, 523-537.

Garcia, A., Leal, M., Lee, S.H., 2019. Endogenous timing with a socially responsible firm. Korean Economic Review. 35(2), 345-370.

Gilo, D., Spiegel, Y., 2004. Network interconnection with competitive transit. Information Economics and Policy. 16(3), 439-458.

Goering, G.E., 2012. Corporate social responsibility and marketing channel coordination. Research in Economics. 66(2), 142-148.

Halm, D., 2009. The effects of Partial Cross-Ownership on competition. Tilburg University.

Haraguchi J., Matsumura T., 2014. Price versus quantity in a mixed duopoly with foreign penetration. Research in Economics. 68(4), 338-353.

Hino, Y., Zennyo, Y., 2017. Corporate social responsibility and strategic relationships. International Review of Economics. 64(3), 231-244.

Hong, H., Kacperczyk, M., 2009. The price of sin: The effects of social norms on markets. Journal of Financial Economics. 93(1), 15-36.

Kim, S. L., Lee, S. H., Matsumura, T., 2019. Corporate social responsibility and privatization policy in a mixed oligopoly. Journal of Economics. 128(1), 67-89.

Kitzmueller, M., Shimshack, J., 2012. Economic perspectives on corporate social responsibility. Journal of Economics. Lit. 50(1), 51–84.

Konigstein, M., Muller, W., 2001. Why firms should care for customers. Economics Letters. 72(1): 47–52.

Kopel, M., 2015. Price and quantity contracts in a mixed duopoly with a socially concerned firm. Managerial and Decision Economics. 36(8), 559-566.

Kopel, M., Brand, B., 2012. Socially responsible firms and endogenous choice of strategic incentives. Economic Modelling. 29(3), 982-989.

KPMG, 2013. Survey of corporate responsibility reporting. 2013 KPMG International.

KPMG, 2015. International survey of corporate responsibility reporting. 2015 KPMG International.

Lambertini, L., Tampieri, A., 2015. Incentives, performance and desirability of socially responsible firms in a Cournot oligopoly. Economic Modelling. 50, 40-48.

Leal, M., Garcia, A., Lee, S.H., 2018. The timing of environmental tax policy with a consumer-friendly firm. Hitotsubashi Journal of Economics. 59(1), 25-43.

Lee, S.H., Park, C.H., 2019. Eco-firms and the sequential adoption of environmental corporate social responsibility in the managerial delegation. B.E. Journal Theoretical Economics. 19(1), 20170043.

Lee, S.H., Sato, S., Matsumura, T., 2018. An analysis of entry-then-privatization model: welfare and policy implications. Journal of Economics. 123(1), 71-88.

Liu, C.C., Wang, L.F.S., Lee, S.H., 2015. Strategic environmental corporate social responsibility in a differentiated duopoly market. Economics Letters. 129, 108-111.

Liu, Q., Wang, L.F.S., Chen, C.L., 2018. CSR in an oligopoly with foreign competition: Policy and welfare implications. Economic Modelling. 72, 1-7.

Liu, Y., Matsumura, T., Zeng, C., 2018. The relationship between privatization and corporate taxation policies. MPRA working paper, No 89784.

Manasakis, C., Mitrokostas, E., Petrakis, E., 2018. Strategic corporate social responsibility by a multinational firm. Review of International Economics. 26(3),709-720.

Matsumura, T., Ogawa, A., 2014. Corporate social responsibility or payoff asymmetry? A study of an endogenous timing game. Southern Economic Journal. 81(2), 457-473.

Planer-Friedrich, L., Sahm, M., 2016. Strategic Corporate Social Responsibility. CESifo conference paper.

Planer-Friedrich, L., Sahm, M., 2018. Why firms should care for all consumers. Economics Bulletin. 38, 1623-1612.

Schreck, P., 2011. Reviewing the business case for corporate social responsibility: New evidence and analysis. Journal of Business Ethics. 103(2), 167–188.

Siegel, D. S., Vitaliano, D. F., 2007. An empirical analysis of the strategic use of corporate social responsibility. Journal of Economics and Management Strategy. 16(3), 773-792.

The UN-Global Compact-Accenture CEO Study 2010. UN Global Compact Reports.

The UN-Global Compact-Accenture CEO Study on Sustainability 2013. UN Global Compact Reports.

Vidal-Leon, C., 2013. Corporate social responsibility, human rights, and the world trade organization. Journal of International Economic Law. 16(4), 893-920.

Wang, L.F.S., Wang, Y.C., Zhao, L., 2012. Tariff policy and welfare in an international duopoly with consumer-friendly initiative. Bulletin of Economic Research. 64(1), 56-64.

Withisuphakorn, P., Jiraporn, P., 2016. The effect of firm maturity on corporate social responsibility (CSR): Do older firms invest more in CSR? Applied Economics Letters. 23(4), 298-301.

Xu, L., Lee, S.H., 2019. Tariffs and privatization policy in a bilateral trade with corporate social responsibility. Economic Modelling. 80, 339-351.

Xu, L., Lee, S.H., Matsumura, T., 2017. Ex-ante versus ex-post privatization policies with foreign penetration in free-entry mixed markets. International Review of Economics and Finance. 50, 1-7.