This essay seeks to give a contractarian foundation to the concept of Corporate Social Responsibility, meant as an extended model of corporate governance of the firm. It focuses on justification according to the contractarian point of view. It begins by providing a definition of CSR as an extended model of corporate governance, based on the fiduciary duties owed to all the firm's stakeholders. Then, by establishing the basic context of incompleteness of contracts and abuse of authority, it analyses how the (...) extended view of corporate governance arises directly from criticism of the contemporary neo-institutional economic theory of the firm. Thereafter, an application of the theory of bargaining games is used to deduce the structure of a multi-stakeholder firm, on the basis of the idea of a constitutional contract, which satisfies basic requirements of impartial justification and accordance with intuitions of social justice. This is a sequential model of constitutional bargaining, whereby a constitution is first chosen, and then a post-constitutional coalition game is played. On the basis of the unique solution given to each step in the bargaining model, the quest for a prescriptive theory of governance and strategic management is accomplished, so that I am able to define an objective-function for the firm consistent with the idea of CSR. Finally, a contractarian potential explanation for the emergence of the multi-fiduciary firm is provided. (shrink)

This essay seeks to give a contractarian foundation to the concept of Corporate Social Responsibility, meant as an extended model of corporate governance of the firm. Whereas, justificatory issues have been discussed in a related paper, in this essay I focus on the implementation of and compliance with this normative model. The theory of reputation games, with reference to the basic game of trust, is introduced in order to make sense of self-regulation as a way to implement the social contract (...) on the multi-fiduciary model of corporate governance. This affords understanding of why self-regulation, meant as mere recourse to a long-run strategy in a repeated trust game, fails. Two basic problems for the functioning of the reputation mechanism are examined: the cognitive fragility problem, and the motivational problem. As regards the cognitive fragilities of reputation, the paper develops the logic and the structure that self-regulatory norms must satisfy if they are to serve as gap-filling tools with which to remedy cognitive limitations in the reputation mechanism. The motivation problem then arises from the possibility of sophisticated abuse by the firm. Developed in this case is an entirely new application of the theory of conformism-and-reciprocity-based preferences, the result of which is that the stakeholders refuse to acquiesce to sophisticated abuse on the part of the firm. (shrink)

By considering what we identify as a problem inherent in the ‘nature of the firm’—the risk of abuse of authority—we propound the conception of a social contract theory of the firm which is truly Rawlsian in its inspiration. Hence, we link the social contract theory of the firm with the general theory of justice. Through this path, we enter the debate about whether firms can be part of Rawlsian theory of justice showing that corporate governance principles enter the “basic structure.” (...) Finally, we concur with Sen’s aim to broaden the realm of social justice beyond what he calls the ‘transcendental institutional perfectionism’ of Rawls’ theory. We maintain the contractarian approach to justice but introduce Sen’s capability concept as an element of the constitutional and post-constitutional contract model of institutions with special reference to corporate governance. Accordingly, rights over primary goods and capabilities are granted by the basic institutions of society, but many capabilities have to be turned into the functionings of many stakeholders through the operation of firms understood as post-constitutional institutional domains. The constitutional contract on the distribution of primary goods and capabilities should then shape the principles of corporate governance so that at post-constitutional level anyone may achieve her/his functionings in the corporate domain by exercising such capabilities. In the absence of such a condition, post-constitutional contracts would distort the process that descends from constitutional rights and capabilities toward social outcomes. (shrink)

We advance the thesis that the method of experimental economics can make significant contributions to normative, as opposed to descriptive, business ethics. We contend that there are two basic ways in which experimental economics may make this contribution, and we exemplify these ways by pointing to experimental support of social contract theory as rational foundation for business ethics. These two ways are: (1) adding psychological realism; and (2) testing some quasi-empirical assumptions present in normative theory. In order to make good (...) our methodological claim, we first describe the methodological rules of experimental economics, distinguishing this method from other behavioral business ethics approaches. We also contemplate the possible objection that empirical methods cannot bear on normative ethics because there is no way of bridging the gap between descriptive theory (how people behave) and normative theory (how people ought to behave). (shrink)

The social contract approach to the study if institutions aims at providing a solution to the problem of compliance with rational agreements in situations characterized by a conflict between individual rationality and social optimality. After a short discussion of some attempts to deal with this problem from a rational choice perspective, we focus on John Rawls's idea of 'sense of justice' and its application to the explanation of the stability of a well-ordered society. We show how the relevant features of (...) Rawls's theory can be captured by a behavioral game theory model of beliefs dependent dispositions to comply, and we present the results of two experimental studies that provide support to the theory. (shrink)

This essay seeks to give a contractarian foundation to the concept of Corporate Social Responsibility (CSR), meant as an extended model of corporate governance of the firm. It focuses on justification according to the contractarian point of view (leaving compliance and implementation problems to a related article, [Sacconi 2004b, forthcoming in the Journal of Business Ethics]). It begins by providing a definition of CSR as an extended model of corporate governance, based on the fiduciary duties owed to all the firm’s (...) stakeholders. Then, by establishing the basic context of incompleteness of contracts and abuse of authority, it analyses how the extended view of corporate governance arises directly from criticism of the contemporary neo-institutional economic theory of the firm. Thereafter, an application of the theory of bargaining games is used to deduce the structure of a multi-stakeholder firm, on the basis of the idea of a constitutional contract, which satisfies basic requirements of impartial justification and accordance with intuitions of social justice. This is a sequential model of constitutional bargaining, whereby a constitution is first chosen, and then a post-constitutional coalition game is played. On the basis of the unique solution given to each step in the bargaining model, the quest for a prescriptive theory of governance and strategic management is accomplished, so that I am able to define an objective-function for the firm consistent with the idea of CSR. Finally, a contractarian potential explanation for the emergence of the multi-fiduciary firm is provided. (shrink)

This essay seeks to give a contractarian foundation to the concept of Corporate Social Responsibility (CSR), meant as an extended model of corporate governance of the firm. Whereas, justificatory issues have been discussed in a related paper (Sacconi, L.: 2006b, this journal), in this essay I focus on the implementation of and compliance with this normative model. The theory of reputation games, with reference to the basic game of trust, is introduced in order to make sense of self-regulation as a (...) way to implement the social contract on the multi-fiduciary model of corporate governance. This affords understanding of why self-regulation, meant as mere recourse to a long-run strategy in a repeated trust game, fails. Two basic problems for the functioning of the reputation mechanism are examined: the cognitive fragility problem, and the motivational problem. As regards the cognitive fragilities of reputation (which result from the impact of unforeseen contingencies and from bounded rationality), the paper develops the logic and the structure that self-regulatory norms must satisfy if they are to serve as gap-filling tools with which to remedy cognitive limitations in the reputation mechanism. The motivation problem then arises from the possibility of sophisticated abuse by the firm. Developed in this case is an entirely new application of the theory of conformism-and-reciprocity-based preferences, the result of which is that the stakeholders refuse to acquiesce to sophisticated abuse on the part of the firm. (shrink)

Abuse of authority is an unsolved problem in the new institutional theory of the firm. This paper attempts a double attack to this problem by developing a contractarian view of corporate codes of ethics. From the ex-ante standpoint the paper elaborates on the idea of a Social Contract based on Co-operative Bargaining Games and deduces from it the fair/efficient 'Constitution' of the firm endorsed by means of a well-devised corporate code of ethics. From the ex-post standpoint, codes of ethics are (...) proved to be self-enforcing norms, by showing how they put at work the mechanism of a Repeated Game of Reputation within hierarchical transactions (firms) characterised by incomplete contracts and unforeseen events. To accomplish this task a theory of rationality in the face of unforeseen contingencies is sketched by working out the idea that the domain of a principle of ethics defines a fuzzy event, i.e. an event to which also the ex-ante unforeseen, unimaginable states of the world belong to a certain degree. (shrink)