Linking Economic and Social-Exchange Games: From the Community Norm to CSR

This paper proposes an analytical approach to the roles of social norm dealing with economic externalities. Traditionally social norms are treated by economists as external constraints or endogenous outcomes of repeated economic transactions. In contrast, this paper formulates a game of social exchanges and characterizes the role of social norm in regulating a game of economic transactions as equilibrium of linked games. Advantage of this approach is manifold: it can clarify conditions for social norm to regulate economic externalities when endogenous reputation mechanism fails as well as to facilitate, rather than deter, a change in economic institution. More specifically, it suggests a solution to the empirical paradox of why a corporate social responsibility program sometimes contributes to a better stock market performance of the corporate firm.