Cui Bono, Benefit Corporation? An Experiment Inspired by Social Enterprise Legislation in Germany and the US
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Sven Fischer
Abstract
How do barely incentivized norms impact incentive-rich environments? We take social enterprise legislation as a case in point. It establishes rules on behalf of constituencies without institutionalized means of enforcement. By relying primarily on managers’ other-regarding concerns while leaving corporate incentive structures unaltered, how effective can such legislation be? We ran a laboratory experiment with a framing likened to German corporate law which traditionally includes social standards. Our results show that a stakeholder provision, as found in both Germany and more recent US regulation, cannot overcome material incentives. Yet even in the absence of adverse incentives the stakeholder duty does not foster other-regarding behavior. Our experiment illustrates the paramount importance of taking into account both incentives and framing effects when designing institutions. We tentatively discuss potential policy implications for social enterprise legislation and the stakeholder debate.
Acknowledgement
We are grateful for helpful comments by Eckart Büren, Michael Dorff, Christoph Engel, Andreas Engert, Kristoffel Grechenig, Oliver Himmler, Klaus-Ulrich Schmolke and two anonymous referees.
Appendix
Random effects GLS estimation of transfers to charity.
| (1) | (2) | (3) | (4) | |
| Period | 19.8 | 38.6 | 38.6 | 38.6 |
| (21.808) | (30.309) | (30.321) | (30.333) | |
| Last period | 2,316.7*** | 43.5 | 43.5 | 43.5 |
| (277.177) | (190.811) | (190.885) | (190.959) | |
| Stake | −499.0** | −796.4 | −924.7* | −976.2** |
| (245.439) | (523.189) | (506.060) | (482.709) | |
| Competition | −1,804.6*** | −2,218.1*** | −1,909.4*** | −2,061.6*** |
| (292.199) | (398.440) | (379.452) | (368.027) | |
| Period | −28.5 | −242.3*** | −240.9*** | |
| (41.974) | (42.577) | (42.615) | ||
| Last period | 3,436.3*** | 3,385.4*** | 3,385.8*** | |
| (373.548) | (373.182) | (373.335) | ||
| Stake | 449.7 | 525.3 | 608.5 | |
| (582.044) | (567.286) | (550.854) | ||
| N unemployed | 458.1*** | 455.1*** | ||
| (62.504) | (62.447) | |||
| Justice sensitivity | 697.0*** | 667.5*** | ||
| (141.596) | (149.971) | |||
| Female | 181.6 | |||
| (276.602) | ||||
| Age | −78.4* | |||
| (43.398) | ||||
| Constant | 3,662.7*** | 3,935.1*** | 1,768.8*** | 3,633.9*** |
| (287.086) | (333.839) | (560.019) | (1,037.428) | |
| Observations | 1,740 | 1,740 | 1,740 | 1,740 |
| Number of subjects | 260 | 260 | 260 | 260 |
| Overall | 0.148 | 0.174 | 0.223 | 0.231 |
| Prob |
Screenshot: Allocation decision by the manager.
Screenshot: Selection of a manager.
Instructions Part 1
Welcome to today’s experiment. Depending on your decisions and those of other participants you will earn money in this experiment. Therefore, it is very important that you read these instructions carefully. Once all participants have read the instructions you will be asked to answer some control questions to check whether all the participants have understood the instructions.
During the whole experiment it is prohibited to communicate with other participants. Please raise your hand and address one of the persons in charge if you have any questions. Any violation of this rule will result in exclusion from this experiment and all possible payments.
During this experiment all monetary amounts will be given in “Taler.” At the end of the experiment the total amount of Talers earned will be converted to Euros at the following rate:
800 Taler = 1 EURO
The experiment consists of over several rounds. [During this experiment you will interact with other participants, who will be assigned to you at random. You will, however, receive no information about their identity; conversely, no participant will receive information about your identity.] or [In every round you will decide on your own, independent of all other participants.]
In every round you will make a business decision in a role that is yet to be assigned to you. As in reality, this decision affects both, the company owner’s revenues and the general public. Therefore, the computer sets up two accounts for each participant: one for the participant himself and one for the general public (the so-called donation account). Any credit balance on the donation account will benefit a charitable organization, which has the seal (“audited and recommended”) of the German Central Institute for Social Questions (Deutsches Zentralinstituts für soziale Fragen, DZI).
At the beginning, both accounts will have a credit balance of 0 Taler. If there is any positive balance on the donation account at the end of this experiment, we will put the equivalent Euro amount inside a glass container. The credit balance on your own account will then be converted to Euros and paid out to you in cash. No participant will be allowed to place additional money in the container before, during or after the payment takes place.
After the payments, we will make an online bank transfer of the collected donations in the glass container to the previously mentioned non-profit organization. You are welcome to attend this process. In any case, we kindly ask the participant in cabin 24 to supervise this transaction.
Instructions Part 2 (Control)
You will make decisions in the following role:
You are the owner of a company in Germany, which you manage on your own.
You will keep this role for the 10 rounds of the experiment.
Basic principle
In each round, you split an amount of 10,000 Taler between yourself and the general public. Hence, you must reduce the amount that could benefit the donation account. Conversely, the more Taler you allocate to the donation account, the less that flows into your account.
Implementation details
Each round happens as follows:
You see the decisions made by yourself in the previous rounds (this is not the case for the first round) and then make a binding decision on how much you would like to assign to your account as well as to the donation account.
At the end of a round you will receive an overview on your decision.
The experiment ends after 10 rounds have been played. One round will then be chosen at random and the payments calculated as follows: You receive the amount that you assigned to your own account in the drawn round.
After each participant has been paid out, we will count the total amount of donations in the glass container and transfer the money to the non-profit organization.
Instructions Part 2 (NoComp**)
At the beginning of the experiment, the computer will assign one out of two possible roles to each participant at random. The role is then fixed for the rest of the experiment. There will be two participants interacting with each other at a time. One of them will play the role of a
Shareholder meaning he/she owns a company in Germany. Shareholders must hire a manager who manages the company under German law for them.
The other will take decisions in the role of a
Managerwho is responsible for independently managing the enterprise. According to German law, a manager is not bound to the expectations and demands of the shareholder. Add the following in Stake [; rather he “manages the enterprise in the interest of the stakeholders (e.g. shareholders, employees, customers, general public), with the objective of sustainable creation of value.” (Sec. 4.1.1 of the German Corporate Governance Code)]
In short: the computer will randomly generate groups with two participants each. It will also assign roles to each group member at random. One group member will act in the role of a shareholder, while the other will act in the role of a manager. This group and role assignment will remain the same throughout all rounds and participants keep their name until the end. Thereafter, the 10 rounds of the game will start.
Basic principle
In each round, the shareholder hires a manager who splits 10,000 Taler between the shareholder and the general public. Hence, the manager must reduce the amount that could benefit the donation account. Conversely, this means that the more Taler allocated to the donation account, the less that flows into the shareholder’s account.
Implementation details
Each round happens as follows:
The shareholder observes the decisions made by the manager, hired in the previous rounds (this is not the case for the first round) and hires the manager.
The manager sees his decisions made in the previous rounds (this is not the case for the first round) before making a binding decision about the amount to add to the shareholder’s account as well as to the donation account.
The shareholder receives the amount allocated to his/her account by the chosen manager during this round.
Regardless of the draw the manager receives 300 Taler for each round – the manager’s decisions have no effect on the amount paid.
Instructions Part 2 (Comp**)
At the beginning of the experiment, the computer will assign one out of two possible roles to each participant at random. The role is then fixed for the rest of the experiment. There will be four participants interacting with each other. One of them will play the role of a
Shareholdermeaning he/she owns a company in Germany. Shareholders must hire a manager who manages the company under German law for them.
The other three will take decisions in the role of a
Managerwho is responsible for independently managing the enterprise. According to German law, a manager is not bound to the expectations and demands of the shareholder. Add the following in Stake [; rather he “manages the enterprise in the interest of the stakeholders (e.g. shareholders, employees, customers, general public), with the objective of sustainable creation of value.” (Sec. 4.1.1 of the German Corporate Governance Code)]
In short: the computer will randomly generate groups with four participants each. It will also assign at random the role of the shareholder to one subject and at random to the others to the roles of the three managers manager 1, manager 2 and manager 3. This group and role assignment will remain the same throughout all rounds. Managers will also keep their name until the end. Thereafter, the 10 rounds of the game will start.
Basic principle
In each round, the shareholder hires a manager who splits 10,000 Taler between the shareholder and the general public. Hence, the manager must reduce the amount that could benefit the donation account. Conversely, this means that the more Taler allocated to the donation account, the less that flows into the shareholder’s account.
Implementation details
Each round happens as follows:
The shareholder observes the decisions made by the managers hired in the previous rounds (this is not the case for the first round) and hires one of the three managers who has to decide in this round.
At first, the three managers will not receive information on the shareholder’s decision and everyone decides as if he/she was hired: Everyone sees the decisions made by the managers hired in the previous rounds (this is not the case for the first round) before making a binding decision about the amount to add to the shareholder’s account as well as to the donation account.
At the end of each round, everyone will get an overview on which manager was hired and the manager’s decision. The experiment ends after 10 rounds. Then, one round will be randomly chosen and the payments calculated as follows:
The shareholder receives the amount allocated to his/her account by the chosen manager during this round.
Regardless of the draw each manager receives 900 Taler for each round in which he/she was chosen by the shareholder – the manager’s decisions have no effect on the amount paid.
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Articles in the same Issue
- Frontmatter
- Comparing All-or-Nothing and Proportionate Damages: A Rent-Seeking Approach
- Discounting and Criminals’ Implied Risk Preferences
- Documenting Legal Dissonance: Legal Pluralism in Papua New Guinea
- Proportionality Degree of Electoral Systems and Growth: A Panel Data Test
- Cui Bono, Benefit Corporation? An Experiment Inspired by Social Enterprise Legislation in Germany and the US
Articles in the same Issue
- Frontmatter
- Comparing All-or-Nothing and Proportionate Damages: A Rent-Seeking Approach
- Discounting and Criminals’ Implied Risk Preferences
- Documenting Legal Dissonance: Legal Pluralism in Papua New Guinea
- Proportionality Degree of Electoral Systems and Growth: A Panel Data Test
- Cui Bono, Benefit Corporation? An Experiment Inspired by Social Enterprise Legislation in Germany and the US
