Is there a Willingness-to-pay for Social Responsibility?

Table of contents

List of abbreviations

List of tables

1. Introduction

2. Decision-making characteristics

3. Consumer perspective

4. Investor perspective
4.1 The loyalty of SRI investors
4.2 Principles of investing
4.3 Willingness-to-forgo for social responsibility

5. Conclusion

Appendix

References

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of tables

Table 1: Results of the consumer perspective

Table 2: Results of the investor perspective

1. Introduction

Recent years pointed out that an increasing consumption of socially respon­sible products by consumers can be found. This was indicated by the annual report of the Fairtrade Labelling Organisation. The Fairtrade mark is com­monly recognised as the world's leading socially responsible label; support­ing farmers and workers with fair wages.¹

Social responsibility

Today's consumer can choose from a wide selection of products. Besides the common attributes price, quality, value and brand, there exists a great range of products that offer socially responsible aspects. According to the Commis­sion of the European Communities (2001), social responsibility or corporate social responsibility can be described “as a concept whereby companies inte­grate social and environmental concerns in their business operations”². The mentioned description is the summarisation of several definitions and inter­pretations that have been used by various people over the years. The concept of social responsibility could include the production and sale of fair-traded, ecological produced or animal-testing-free products, to name some examples. A consumer report by Nielsen (2008) indicated that social responsibility gets consumers attention on a large basis. Approximately 67 percent of the global average acquired socially responsible products showing interest in supporting social and environmental issues.³ This report and the development of pro­grams such as Fairtrade indicate that consumers are aware of and concerned about the social responsibility of companies. The question that remains is: Are individuals willing to pay for this responsible behaviour of companies?

Willingness-to-pay

Individuals' willingness-to-pay (WTP) can be stated as the perceived benefit of a product. That means, only if the price equals or undercuts the perceived benefit the consumer is considering buying the product.⁴ The current state of research on consumer's social responsibility supports the existence of this WTP for socially responsible goods. Different measurement-approaches pointed out, that some consumers are willing to pay a price premium in favour of consuming in a socially responsible way.

Bollen (2007) hypothesised that an investor “may view investing in an SR [socially responsible] fund as consuming the SR attribute.”⁵ Following this statement, it is of interest if investors show a similar behaviour compared to the consumer. Especially socially responsible investing (SRI) offers the op­portunity to observe investors' attitudes, preferences and concerns towards social responsibility. The World Economic Forum (2011) defines SRI “as an investment approach that integrates long-term environmental, social, and governance criteria into investment and ownership decision-making with the objective of generating superior risk-adjusted financial returns.”⁶ The integra­tion of personal values and societal concerns with the investment decision is the key feature of SRI and most visibly via investing with social screens.⁷ SRI, also referred to as ethical investing, has originated in a religious context and was founded to match investors beliefs with their investment policies.⁸ For example, Islamic investors predominantly avoid investments in pork pro­duction, gambling andinterest-based banking.⁹

The aim of this literature-based bachelor thesis is not only to prove the exist­ence of a WTP for social responsibility, but also to highlight significant fac­tors that influence individual behaviour.

First, two decision-making concepts will be described. Afterwards, the WTP for social responsibility will be analysed, comparing both the consumer per­spective and the investor perspective. This procedure allows a greater under­standing and comparison of human behaviour in different situations. Even though both perspectives will be discussed, the main focus of this thesis lies on the investor perspective. Therefore, the loyalty of SRI investors, the prin­ciples of investing and the influencing factors on investor's SRI behaviour will be analysed in more detail.

2. Decision-making characteristics

There are various ways to explain consumer's or individual's decision-mak­ing. This thesis will highlight two approaches that are of most interest: The decision-making process and the utility theory.

The decision-making process represents every activity an individuum passes when purchasing products. The studies of consumer behaviour and con­sumer's decision-making state that the decision-making process includes sev­eral stages. To get a first understanding of how individuals make decisions this thesis refers to the consumer decision process model by Blackwell et al. (2006). The model follows a schematic format to capture activities that occur when decisions are made.¹⁰ Thereby, it shows how several forces affect the thinking, evaluating and acting of individuals.¹¹ One goal is to analyse how consumers make consistent and logical decisions. The seven typical stages of decision making are need recognition, search for information, pre-purchase evaluation, purchase, consumption, post-consumption evaluation and divest- ment.¹²

Additional to the stages there are many factors and determinants shaping the consumer's decision making.¹³ First, there are individual differences like de­mographics, psychographics, values and personality that can affect buying behaviour.¹⁴ The second category includes environmental influences such as culture, social class, family, personal influences and situation.¹⁵ The last cat­egory contains psychological processes that influence consumer behaviour. Among them are information processing, learning, attitude and behaviour change.¹⁶

The second approach is the utility theory, that gives explanation about the preferences of consumers. The fundamental advantage of the utility theory is its ability to order several alternatives according to individual preferences ex­pressed as numbers. One alternative is preferred, when the individual derives a greater amount of utility through it.¹⁷ The individual could prefer one alter­native over the other or be indifferent between them.¹⁸ Furthermore, the utility of an alternative can be stated as the sum of its different attributes.¹⁹ These multiple-factor situations allow for a greater understanding of decision-mak- ing.²⁰ Multi-attribute decision-making is the basis of most buying behav- iours.²¹ The consumer or investor takes different attributes of a product into account. These attributes are for example price, value, brand, risk, return and ethical characteristics of the specific product.²²

3. Consumer perspective

Influences on consumers' purchasing behaviour

With focus-group discussions, Carrigan and Attalla (2001) collected consum­ers' opinions and attitudes in terms of social responsibility and their purchase behaviour.²³ The group discussions of participants aged between 18 and 25 years suggested that past unethical behaviour of firms has no affect on their purchase intention.²⁴ The participants had difficulties to name socially re­sponsible firms, what indicated cynicism when it comes to socially responsi­ble behaviour of firms.²⁵ Moreover, they believed they cannot do a lot against bad ethical behaviour of firms.²⁶ When asked about important factors that in­fluence their purchase decision, price, value, brand image and fashion trends were the four most important factors mentioned.²⁷ However, the participants stated, that information on unethical firm behaviour would also influence their purchase decision.²⁸

For further insights Mohr and Webb (2005) conducted a survey with 194 adults to observe the influence of price and corporate social responsibility on consumer behaviour.²⁹ The participants were asked to imagine that they would buy sport shoes at a store.³⁰ Manipulating corporate social responsibil­ity and the price of the product, Mohr and Webb (2005) found that corporate social responsibility has a positive impact on the purchase intention and the company image.³¹ Moreover, information on low social responsibility and the provision of information about high social responsibility differed in their im­pact on the purchase intention and company evaluation.³² The impact was stronger when information about low social responsibility was received.³³ This result stays in line with Carrigan and Attalla's (2001) findings about the effect of bad ethical information on the purchase decision. Further findings of Mohr and Webb (2005) suggested, that participants assumed the firm to behave responsible when they received no information about the social re- sponsibility.³⁴ This could indicate, that consumers hold a general credit of trust towards the responsible behaviour of firms.

In another survey, Ha-Brookshire and Norum (2011) examined significant factors of the WTP for socially responsible cotton products.³⁵ During a tele­phone survey, 500 respondents were asked about their WTP for cotton shirts.³⁶ The analyses of the interviews showed, that more than 50 percent of the respondents were willing to pay more for socially responsible produced cotton shirts.³⁷ Furthermore, Ha-Brookshire and Norum (2011) found, that strong attitudes towards socially responsible cotton apparel affect this WTP.³⁸

Additionally to the findings of Ha-Brookshire and Norum (2011), Mohr and Webb (2005) and Carrigan and Attalla (2001), the results of Auger et al. (2003) showed that the ethical feature itself has an impact on the purchase intentions of consumers.³⁹ To investigate the value of social responsibility as a feature of products, Auger et al. (2003) conducted a two-stage experiment including a survey and a choice experiment.⁴⁰ The results strongly indicated that providing information on the ethical feature of a product increases the purchase probabilities. Moreover, the ethical feature seemed to be the main factor for the increased purchase.⁴¹ On the one hand, the 445 respondents of the experiment showed strong disapproval regarding animal testing and child labour and valuated the ethical components of products quite high.⁴² On the other hand, Auger et al. (2003) indicated “that most consumers do not under­stand the ethical dimension of the products that they purchase.”⁴³

Measurement of the willingness-to-pay

There are many ways to measure the WTP for socially responsible consumer goods: a conjoint analysis of a conducted survey, choice experiments, incen­tive auctions or field experiments. This part of the thesis will concentrate on the WTP for Fairtrade products. That is,because the Fairtrade label is one of the best-known ethical labels. According to Fairtrade International's (2018) report, there are a variety of 30000 different products. Also, global Fairtrade sales reached 8.49 billion euro in 2017.⁴⁴ The key features of Fairtrade are the provision of a minimum wage for farmers and the ban of child labour.⁴⁵

Pelsmacker et al. (2005) investigated how much consumers were willing to pay extra for the socially responsible attribute when purchasing Fairtrade cof­fee. In addition, they created different groups to show how consumers dif­fered in terms of their WTP.⁴⁶ They used a conjoint analysis of 808 surveys of Belgian respondents to give consumers realistic multi-attribute choice de- cisions.⁴⁷ The conjoint analysis resulted in an average WTP of a 10 percent price premium. Furthermore, 35 percent of the 808 respondents were prepared to pay this premium.⁴⁸ Additionally, Pelsmacker et al. (2005) divided the re­spondents into four groups: fair-trade lovers, fair-trade likers, flavour lovers and brand lovers.⁴⁹ Most interesting were the findings about the fair-trade lovers, who had the strongest preferences for the Fairtrade label.⁵⁰ About 90 percent of the people in this group were willing to pay the average price premium of 10 percent.⁵¹ Admittedly, fair-trade lovers only constituted 11 percent of the total sample.⁵²

Didier and Lucie (2008) found similar results, but instead of using a conjoint analysis, they used the Becker-DeGroot-Marschak auction. This incentive ap­proach measures the WTP close to reality, as consumers actually had to pur­chase the product in the experiment.⁵³ Didier and Lucie (2008) used chocolate bars to observe the WTP of 102 respondents.⁵⁴ Their results indicated that compared to conventional products, the WTP for Fairtrade products is higher.⁵⁵ Moreover, by segmenting the respondents, Didier and Lucie (2008) found that the WTP differed significantly across diverse segments.⁵⁶

The results of Pelsmacker et al. (2005) and Didier and Lucie (2008) indicated a WTP for Fairtrade products, which differed in terms of consumers prefer­ences. The incentive approach used by Didier and Lucie (2008) allowed for buying situations close to reality. However, the most realistic buying situation is offered by field experiments. The participants do not know that they are part of an experiment and reveal their unbiased WTP. Hainmueller et al. (2015) used a natural field experiment analysing 26 stores of a major grocery store chain in the United States.⁵⁷ They investigated consumer demand for Fairtrade products and the impact of the label focussing on two Fairtrade cof- fees.⁵⁸ To do so, Hainmueller et al. (2015) manipulated the information on Fairtrade in several experimental stages and analysed weekly registered data.⁵⁹ One of the experiment-stages included the presence of a Fairtrade la­bel, while it was removed in another stage. This procedure resulted in an increase of weekly sales by almost 10 percent of coffee that carried a Fairtrade label.⁶⁰

The overall results regarding Fairtrade products clearly show that there is a WTP for social responsibility. In terms of Fairtrade the product mainly bene­fits human individuals. However, there are further beneficiaries of social re­sponsibility and different products besides the Fairtrade category. To reveal if products with benefits for animals or the environment affect the WTP as much as fair wages, further investigation is required.

Therefore, Tully and Winer (2014) conducted a meta-analysis of over 80 re­search papers including 174 observations.⁶¹ They analysed a possible influ­ence of general beneficiaries on the WTP and summarised the results across different product categories.⁶² Their findings showed, that most of the studies concentrate on the environment as beneficiary of social responsibility.⁶³ Moreover, these studies revealed that products, which benefit the environ­ment derived a lower WTP.⁶⁴ Consumers were willing to pay a greater price premium for products that offered good working conditions like Fairtrade la­belled products.⁶⁵ 163 observations showed an average WTP of consumers of 16.8 percent over the base price. Across 107 observations, 59.7 percent of the participants were willing to pay a premium.⁶⁶ Furthermore, the price premium of those participants was 5.77 percent higher than the price premium of the overall sample.⁶⁷

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¹ See Fairtrade International (2018), p. 2.

² Commission of the European Communities (2001), p. 6.

³ See The Nielsen Company (2008), p. 4.

⁴ See Völckner (2006), p. 34.

⁵ Bollen (2007), p. 685.

⁶ The World Economic Forum (2011), p. 12.

⁷ See Bollen (2007), p. 683 f.

⁸ See Kiymaz (2012), p. 426.

⁹ See Kiymaz (2012), p. 426.

¹⁰ See Blackwell et al. (2006), p. 70.

¹¹ See Blackwell et al. (2006), p. 70.

¹² See Blackwell et al. (2006), p. 70.

¹³ See Blackwell et al. (2006), p. 86.

¹⁴ See Blackwell et al. (2006), p. 86.

¹⁵ See Blackwell et al. (2006), p. 87.

¹⁶ See Blackwell et al. (2006), p. 88.

¹⁷ See Fishburn (1970), p. 2.

¹⁸ See Fishburn (1970), p. 2.

¹⁹ See Fishburn (1970), p. 42.

²⁰ See Fishburn (1970), p. 42.

²¹ See Pelsmacker et al. (2005), p. 365.

²² See Pelsmacker et al. (2005), p. 365.

²³ See Carrigan and Attalla (2001), p. 560.

²⁴ See Carrigan and Attalla (2001), p. 568.

²⁵ See Carrigan and Attalla (2001), p. 568.

²⁶ See Carrigan and Attalla (2001), p. 569.

²⁷ See Carrigan and Attalla (2001), p. 569.

²⁸ See Carrigan and Attalla (2001), p. 569.

²⁹ See Mohr and Webb (2005), p. 121.

³⁰ See Mohr and Webb (2005), p. 128.

³¹ See Mohr and Webb (2005), p. 132.

³² See Mohr and Webb (2005), p. 133.

³³ See Mohr and Webb (2005), p. 133.

³⁴ See Mohr and Webb (2005), p. 140.

³⁵ See Ha-Brookshire and Norum (2011), p. 346.

³⁶ See Ha-Brookshire and Norum (2011), p. 347.

³⁷ See Ha-Brookshire and Norum (2011), p. 348.

³⁸ See Ha-Brookshire and Norum (2011), p. 350.

³⁹ See Auger et al. (2003), p. 291.

⁴⁰ See Auger et al. (2003), p. 285.

⁴¹ See Auger et al. (2003), p. 291.

⁴² See Auger et al. (2003), p. 296.

⁴³ Auger et al. (2003), p. 299.

⁴⁴ See Fairtrade International (2018), p. 11.

⁴⁵ See Hainmueller et al. (2015), p. 243.

⁴⁶ See Pelsmacker et al. (2005), p. 369.

⁴⁷ See Pelsmacker et al. (2005), p. 368.

⁴⁸ See Pelsmacker et al. (2005), p. 376.

⁴⁹ See Pelsmacker et al. (2005), p. 375.

⁵⁰ See Pelsmacker et al. (2005), p. 375.

⁵¹ See Pelsmacker et al. (2005), p. 376.

⁵² See Pelsmacker et al. (2005), p. 380.

⁵³ See Didier and Lucie (2008), p. 480.

⁵⁴ See Didier and Lucie (2008), p. 482.

⁵⁵ See Didier and Lucie (2008), p. 485.

⁵⁶ See Didier and Lucie (2008), p. 485.

⁵⁷ See Hainmueller et al. (2015), p. 245.

⁵⁸ See Hainmueller et al. (2015), p. 245.

⁵⁹ See Hainmueller et al. (2015), p. 245.

⁶⁰ See Hainmueller et al. (2015), p. 242.

⁶¹ See Tully and Winer (2014), p. 265.

⁶² See Tully and Winer (2014), p. 256.

⁶³ See Tully and Winer (2014), p. 262.

⁶⁴ See Tully and Winer (2014), p. 262.

⁶⁵ See Tully and Winer (2014), p. 262.

⁶⁶ See Tully and Winer (2014), p. 262.

⁶⁷ See Tully and Winer (2014), p. 262.