Abstract

When consumers cannot verify corporate social goodwill, rms may be reluctant to uphold a pledge of social goodwill. We show how imperfect monitoring can mitigate this moral hazard problem.
We augment the standard model of price signaling by allowing consumers to use the results of independent monitoring as a complementary source of information. Before sending a price signal to consumers, rms pledge or not to invest in social goodwill. Monitoring corrects for consumers’ arbitrary beliefs.
With no monitoring, rms do not abide by their pledges of social goodwill when they fail to send a credible signal via price,
With monitoring, there exist equilibria in which a rm invests in social goodwill and succeeds in signaling its choice via price. We conclude that independent monitoring, although imperfect, helps a rm fulll its pledge of social goodwill by restoring the credibility of price signaling.
Keywords: credence good, monitoring, signaling.
JEL Code: D8, H4, L15, L31, Q5.
CO author : Alexandre Volle

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