Robbing Peter to Pay Paul? Delegation Contracts and Social Spillovers

In this study, I present an experimental design to explore Friedman's claim that the managerial pursuit of socially responsible activities is always costly to owners when the material interests of owners are in conflict with the material interests of a third party. Leaving normative arguments aside, I investigate the descriptive validity of his claim when agents have full discretion over their productivity as well as the social impact of the firm. The results show that more socially-minded agents generally choose more socially responsible ways to generate profits but fully endogenize the costs, such that principals receive identical payoffs. Differentiating between prudent and hazardous profit targets reveals that the observation holds only when the principal's profit targets do not require damages to the third party. Most agents tend to reduce efforts in response to hazardous targets. This suggests that prosocial agents maximize value for prosocial principals, and self-interested agents maximize value for self-interested principals. Principals extract the highest surplus when bonuses are discretionary rather than incentive compatible