Can Welfare Economics Justify Corporate Philanthropy? Proposing the Philanthropy Multiplier as a Metric for Evaluating Corporate Philanthropic Expenditures

Abstract

Much business ethics and corporate social responsibility literature suggests, implicitly or explicitly, that firms ought to engage in activities that can be characterized as philanthropy, namely, expending resources beyond what is required by law and market norms to promote others’ welfare at the expense of firm profits. However, this literature has struggled to provide a normative framework for evaluating corporate philanthropy, although scholars have noted that such expenditures can potentially remedy market failures and provide public goods more efficiently. I articulate two specific rationales that can justify corporate philanthropy based on considerations of welfare economics: 1) firms making strategic but high-risk investments in activities that are likely to generate positive externalities even if they prove unprofitable and 2) firms possessing a strong comparative advantage in their ability to address a social problem at lower social cost. Moreover, these rationales can be evaluated by a concept I develop called the philanthropy multiplier, indicating the ratio of net positive externalities to net costs. I suggest that firms consider publicizing their philanthropy multipliers, and I discuss theoretical and practical implications.