An Experiment on the Stakeholder Firm: Shareholders, Consumers and Corporate Externalities

Abstract

How do boards shape corporate outcomes when production affects different types of stakeholders: shareholders, consumers and third parties? In a laboratory experiment, participants sit on corporate boards that choose a firm’s production level under varying governance structures, externality levels, and disagreement defaults. We find that, when both shareholders and consumers are represented on the board, the outcome equalizes profit and consumer surplus and is virtually insensitive to the disagreement default, contrary to cooperative game theory predictions. This outcome is driven by other-regarding preferences, cross-type communication, and the consensus requirement. Although all governance structures internalize third-party externalities, the consensus requirement dampens this responsiveness, revealing a trade-off between stakeholder equity and externality sensitivity.