Corporate Goodwill: A Game Theoretic Approach to the Effect of Corporate Charitable Expenditures on Firm Behaviour

Abstract

Corporate contributions to charity, like advertising expenditures, may have a long-term effect on a firm's image and profits. Recent examples of corporate giving show that many gifts are made in the 'enlightened self-interest' of the donor. One way to view corporate giving is as a managerial tool that affects the firnis profits. This paper examines charitable spending, where firms treat 'goodwill' expenditures in both the product and factor markets as strategic variables. Contributions may be enhanced or impaired by contributions made by other firms. The model allows firms to make decisions about corporate giving that are cooperative or noncooperative, where efficiency is gained through cooperation. Market conditions determine whether cooperation is sustainable. As the time horizon lengthens, the discount factor of future earnings rises, or the level of industry cooperation rises, and firms are more likely to cooperate in charitable giving.