Introduction

The paper by Philip Bond and Doron Levit (2024) investigates the equilibrium effects of the social (“S”) dimension of ESG policies under imperfect competition. It explores how firms’ commitments to treat stakeholders better than market conditions dictate can influence market power, profitability, and welfare. The authors contrast the traditional shareholder primacy model, where firms maximise profit, with the stakeholder capitalism model, where firms aim to maximise overall surplus. They find that moderate ESG policies can enhance competition and efficiency, while overly aggressive policies can backfire, reducing both firm and social welfare.

Framework of analysis

The study focuses on how ESG pledges, such as higher employee wages, better benefits, or improved customer service standards, alter firm behaviour in labour and product markets. Using a Cournot model of imperfect competition, the authors show that such pledges have both pro- and anti-competitive effects. The pro-competitive effect arises when ESG actions increase competition by reducing firms’ monopsony or oligopoly power. The anti-competitive effect appears when costs rise excessively, leading to reduced output or employment. The paper develops its analysis in two corporate governance settings: the shareholder primacy and stakeholder capitalism paradigms.

Competition between ESG and non-ESG firms

When a single firm adopts an ESG policy, moderate commitments can increase its employment and market share by forcing rivals to compete more aggressively. For instance, a moderate ESG wage policy leads to higher total employment and welfare, benefitting both the adopting firm’s and competitors’ workers. However, excessively high ESG commitments—such as paying wages far above market rates—reduce competitiveness and profitability. The authors refer to this as the point where pro-competitive effects turn anti-competitive.

Shareholder-value maximising ESG policies

Under the shareholder primacy model, firms select ESG policies that enhance profits. The study finds that moderate ESG actions can increase a firm’s profitability by committing it to compete more aggressively, effectively reducing monopsony distortions. In contrast, aggressive ESG policies reduce profits and social welfare. Industry-level analysis shows that when less productive firms adopt ESG policies, industry profits and efficiency decline, but when more productive firms adopt them, total surplus may rise.

Purposeful Firms’ Preferred Esg Policies

Purposeful firms—those adopting stakeholder capitalism—choose stronger ESG policies than shareholder-focused firms. The optimal ESG policy for such firms balances the interests of shareholders and employees, resulting in the “size-maximising” ESG level where pro-competitive and anti-competitive effects meet. However, from a social welfare perspective, purposeful firms tend to overinvest in ESG, as their larger scale introduces inefficiencies. The authors note that moderate shareholder weighting on boards could mitigate this effect.

Competition in esg policies

When multiple firms compete using ESG strategies, the dynamics vary by governance structure. Among shareholder firms, ESG commitments are strategic complements at moderate levels and substitutes at extreme levels. Competition in ESG can raise worker welfare but reduce industry profits. Among purposeful firms, ESG competition results in the first-best outcome, eliminating market power distortions. The interaction between purposeful boards and profit-maximising managers ensures firms grow “large, but not too large,” creating efficient market outcomes.

Implications

The study identifies several implications for corporate practice and policy. It links the rise of ESG to increasing market concentration, shifts in investor preferences, and cyclical patterns where moderate ESG periods are followed by aggressive ones. The authors suggest that ESG-linked executive pay offers limited social benefit and that stakeholder-oriented firms function best when boards set ESG policies while managers focus on profit maximisation. Transparency and disclosure regulations aid ESG adoption under shareholder primacy but are less influential under stakeholder capitalism.

Empirical implications and conclusion

The model predicts that moderate ESG policies increase firms’ market share, total employment, and worker welfare, while extreme policies reduce efficiency. It further predicts that ESG-active firms are less sensitive to their own productivity shocks but more responsive to rivals’ shocks. Periods of rising ESG adoption may reflect both market concentration and shifts in social preferences. The paper concludes that while ESG can mitigate market power, only competition among purposeful firms achieves efficient outcomes, making ESG a potential “panacea” for market distortions.