Corporation giving: an investment in goodwill

The philanthropic activities of corporations provide an interesting economic problem because traditional economic theory appears to not allow for this type of behavior on the part of the firm. However, such activity does take place and economists have recently begun to investigate the philanthropic activities of corporate organizations. Three main reasons are usually postulated to explain corporate giving. The first is that corporations make gifts and contributions for the same reasons individuals make them. When a corporation is considered in terms of an organization the above reason is no longer a good explanation of corporate philanthropic activity. The other common reasons offered for corporate giving are first, that gifts can achieve the same results as more common types of business expenditures and second, corporations give because society requires that they do so. Both of these reasons are useful in providing an explanation of why corporations undertake philanthropic activities. In this paper corporate philanthropy is discussed in terms of an investment in a stock of goodwill. This investment in goodwill concept is used in order to provide a framework which will allow corporation giving to be studied with the same tools that are used to study other business expenditures. The optimal quantity of goodwill from gifts is assumed to be related to the amount of goodwill the firm obtains from advertising, the amount the firm spends on employee fringe benefits, and the amount which society expects the firm to give. A brief empirical study indicates the relationship between corporation giving and the factors mentioned above. Other questions such as the cost of the gift to the corporation and the relationship between corporation giving and economic efficiency are also discussed in separate sections. The result of this paper is that corporation giving has been placed in an analytical frameowrk which allows it to be studied by using the traditional tools of economic analysis. It also emphasizes the returns to the corporation from giving and allows the corporation to approach its giving decisions in a more rational manner