Abstract:
This paper analyzes the optimal strategy of a profit-maximizing firm in response to social responsibility concerns of consumers. We show that firms will address responsibility demands if consumers are sufficiently motivated and society provides minimal monitoring of false claims. We further show that there is an interaction between the firm’s basic positioning and the type of responsibility initiative it undertakes. A firm selling a low quality product commits to social responsibility in the form of good citizenship by investing in compliance with social norms valued by all consumers. In contrast, a firm selling a high quality product tends to contribute to social causes endorsed by its target customers. Under asymmetric information, when consumers cannot observe product quality, we find that a firm can signal its commitment to social responsibility by charging a higher price and by making exaggerated claims that would be too damaging if they were not largely true. Finally, in a vertically differentiated duopoly, we find that only one firm will take on social responsibility initiatives. Overall, these findings suggest that profit-driven competitive marketing strategies can fulfill social responsibility just as much as any other driver of consumer utility.

Abstract:
Fairness can be defined as a claim to entitlements. In this project we study people’s perception of fairness in times of profits and in times of losses. Specifically, we study negotiation games in which two players (known as the proposer and the respondent) interact to decide how to divide a loss and how to divide a gain. The games are played with real money invested by subjects who were paid between ten and forty euro one week before. In a series of experiments, with approximately 150 students, we find that when participants divide a gain, proposers are mildly unfair. However, when participants divide a loss, we find that proposers are generous and propose to suffer a majority of the loss. We argue that the proposer has a feeling of entitlement that causes her to frame her payoff as a reduced loss. The results of our study contribute to our understanding of how the standards of fairness may act as a constraint to undertake profit seeking business activities.

Abstract:
This project examines the broader effects of the US financial crisis on global lending to retail customers. In particular we examine retail bank lending in Germany taking advantage of a unique data set of German savings banks over the period 2006–2008 for which we have the universe of loan applications and loans granted in this time period. Our experimental setting allows us to distinguish between those savings banks affected by the US financial crisis, through their holdings in Landesbanken with substantial subprime exposure, and unaffected savings banks. We are further able to distinguish between demand and supply side effects of bank lending. We find demand for loans goes down but is not substantially different for the affected and non-affected banks. We find evidence of a supply side effect in that the affected banks reject substantially more loan applications than non-affected banks. This effect is particularly strong for smaller and more liquidity-constrained banks as well as for mortgages as compared to consumer loans. We also find that bank-depositor relationships help mitigate these supply side effects.

Publication
Manju Puri, Jörg Rocholl, Sascha Steffen (2011)
Global retail lending in the aftermath of the US financial crisis: Distinguishing between supply and demand effects
Journal of Financial Economics, 100(3): 556–578