International trade and environmental corporate social responsibility

Abstract

This paper analyzes firms' incentives to engage in environmental corporate social responsibility (ECSR) in an international market under imperfect competition. We find that in the absence of environmental taxes firms do not adopt ECSR. However, the implementation of environmental taxes by governments encourages firms to adopt ECSR under local damage. Consumers, producers, and environmentalists are better off if firms decide to be environmentally responsible than if they decide not to. We also find that the decision to adopt ECSR depends on transboundary pollution. Under global damage firms engage in ECSR only if they are highly concerned about the environment. This means that the existence of transboundary pollution negatively affects the incentives of firms to be environmentally friendly. Finally, we find that when governments cooperatively determine their environmental taxes, firms engage in ECSR under both local and global damage. Thus, under global damage firms have greater incentives to be environmentally friendly when governments cooperate on environmental policies than when they do not.