The Industrial Organization of Private Politics

Private politics social pressure is led by social activists who use confrontational and cooperative strategies to induce firms to provide social benefits. A confrontational activist demands that a firm change its practices and threatens a harmful campaign if it does not change. A cooperative activist uses its expertise to identify benefits from a change in practices or provides external legitimacy for a firm. The greater the threat from a confrontational activist the more aggressively the potential targets compete for an engagement with the cooperative activist. If firms would reject the demands of the confrontational activist, the cooperative activist chooses a socially responsible firm over a profit-maximizing firm, and the confrontational activist then campaigns against a profit-maximizing firm. If the threat is sufficiently strong that the firms would accept the demand of the confrontational activist, the cooperative activist is indifferent to which firm it chooses. Consequently, when campaigns are observed, profit-maximizing firms are matched with confrontational activists, and socially responsible firms are matched with cooperative activists. The threat of confrontation creates a positive externality for the cooperative activist, which has an incentive to contribute to the campaign of the confrontational activist.