Winning us with trifles: Adverse selection in the use of philanthropy as insurance

Jiao Luo, Aseem Kaul, Haram Seo

Research output: Contribution to journalArticlepeer-review

16 Scopus citations

Abstract

Research Summary: We study the use of corporate philanthropy as a form of reputation insurance, developing a formal model of such insurance to examine how the terms of insurance in equilibrium change under different assumptions about the firm and its stakeholders. We then test the predictions from this model in the U.S. petroleum industry and find that philanthropic donations offer insurance-like benefits, but are also positively associated with subsequent oil spills—firms that give more, spill more—with this association being stronger for spills that are under firms’ control and in states with low civic capacity. These results are consistent with an adverse selection/moral hazard equilibrium and suggest that the use of philanthropy as reputation insurance may benefit firms at the cost of society. Managerial Summary: Firms that donate to social causes develop a reputation for being socially responsible, and are often given the benefit of doubt when negative information about them comes to light. But are philanthropic firms truly more responsible? We argue that firms that donate more may be more likely to do harm—those that expect to do harm later are likely to give more now, and those that know their reputation protects them may become less careful. Evidence from the U.S. petroleum industry is consistent with this argument, with firms that give more having more subsequent oil spills, but only the type of spills that are under the firm's control, and only in states where the firm faces weaker scrutiny.

Original languageEnglish (US)
Pages (from-to)2591-2617
Number of pages27
JournalStrategic Management Journal
Volume39
Issue number10
DOIs
StatePublished - Oct 2018

Bibliographical note

Funding Information:
We thank Editor Sendil Ethiraj and two anonymous reviewers for their generous and insightful feedback throughout the review process. We are also grateful to Alan Benson, Connie Helfat, Vit Henisz, Gwendolyn Lee, Marvin Lieberman, Rich Makadok, Alfie Marcus, Myles Shaver, Wes Sine, Jasjit Singh, Joel Waldfogel, and Sarah Wolfolds as well as to participants at the 2016 Strategic Management Society Conference Junior Faculty Paper Development Workshop, the 2017 Academy of Management Conference, the 2017 Society for Institutional & Organizational Economics Conference, the 2017 Strategic Management Society Conference, and seminar participants at Cornell University, Nanyang Technological University, the National University of Singapore, Purdue University, the University of Florida, and the University of Minnesota for providing comments and feedback. Luo acknowledges research and funding support from Gurneeta Vasudeva Singh and Nicholas Poggioli; some part of the data used in this article were collected in the course of a separate collaboration with Singh and Poggioli that ended in July 2015, and are being used for this study as per mutual agreement with Singh and Poggioli. In fulfilment of this agreement, Luo also acknowledges that once, in the summer of 2015, she, Singh, and Poggioli ran an empirical model similar to one of those reported here on a subset of the data used for this project, while examining a theoretically unrelated question, the findings from which were inconclusive. All errors are our own.

Publisher Copyright:
© 2018 John Wiley & Sons, Ltd.

Keywords

  • corporate philanthropy
  • formal model
  • information asymmetry
  • insurance
  • social impact

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