Community Embeddedness, Consumer Voice, Corporate Social Responsibility

I model how community embeddedness and consumer voice can incentivize firms to be more ethical and socially responsible. Building on x-efficiency theory, I also make the case that being more ethical and socially responsible does not imply higher average costs and lower profits as assumed by conventional economic theory. Moreover, being more ethical or socially responsible need not improve profits or reduce average costs. There is no theoretical reason for self-interested firm decision-makers to be more ethical or socially responsible. Therefore, firms that are embedded in their community and where consumers have effective voice should be more ethical and socially responsible. In this environment, such behaviour makes the firm more competitive. Fear of government intervention is another reason for changes in firm behaviour.