Greenwashing under Competition

The increasing awareness of corporate social responsibility (CSR) makes the investment in CSR activities a strategy to distinguish firms in a competitive environment. In practice, a greenwashing phenomenon is identified where a firm uses CSR investment as a marketing gimmick and only invests in CSR activities observable to consumers while ignoring unobservable ones. To study the phenomenon, we build a game-theoretic model in which a socially responsible firm who intrinsically cares about CSR competes with a profit-maximizing firm who may greenwash. The firms may invest in observable and/or unobservable CSR activities. While consumers are socially minded, they have limited information about the firms' type and may infer it from the observable CSR investment. We analyze the impact of competition intensity on firm's strategies and social welfare. We find that when the transparency (the proportion of observable CSR activities) is low, the profit-maximizing firm has a strong incentive to greenwash. In this case, if the competition intensity is low, the profit-maximizing firm greenwashes; otherwise, the socially responsible firm over-invests in CSR to prevent the greenwashing. While greenwashing decreases consumer surplus, it can result in a higher social welfare. In addition, the social welfare can decrease with the transparency if the competition intensity is low or the consumer reward is small, complementing existing results under the monopoly setting in Wu et al. (2020). We also study the impact of firms' investment on transparency improvement. We find that while an endogenous investment to improve transparency reduces greenwashing, such an investment can backfire and reduce the total CSR level and the social welfare, depending on the base transparency level (i.e., the transparency level before the investment) and the transparency improvement cost.