Corporate Provision of Public Goods∗

Firms spend considerable amounts on socially responsible business practices. These expenditures are often seen as an indirect form of profit maximization or a perquisite of the manager at shareholder expense. We offer a more direct explanation. Since shareholders enjoy both consumption and private benefits from public goods, managers acting on their behalf will (1) provision more public goods than decentralized shareholders would and (2) always produce less than the profit maximizing output. Under mild conditions, (3) the firm produces the socially optimal quantity and partially provisions the public good, without intervention by a social planner, and (4) decreasing marginal production costs increases public goods as much as decreasing marginal externalities. The results are robust to endogenous formation of socially responsible firms and the possibility of takeover by a profit maximizing outsider.