Corporate social responsibility and product quality

We study both theoretically and empirically the relationship between different types of corporate social responsibility (CSR) and a firm's product quality. On the one hand, observable external CSR (e.g., a firm's involvement in a social project) can be used as a signal to unobservable product quality. On the other hand, internal CSR (e.g., human resources practices such as training and labor stability) can improve a firm's labor productivity, specially in firms supplying high quality. We show that CSR may serve as a tool for a firm's product differentiation strategy, finding that both internal and external CSR enhance a firm's product quality. Moreover, this implies the existence of complementarity between internal and external CSR (they mutually reinforce each other) through product quality. We test our theoretical results with data from the hotel industry where we show that hotel establishments with a higher product quality are indeed more likely to be socially responsible, both internally and externally, indicative of the existence of complementarity.