International Journal of Hospitality Management 66 (2017) 130–134

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International Journal of Hospitality Management

journal homepage: www.elsevier.com/locate/ijhosman

A theoretical link between corporate giving and hospitality firm

performance
Ming-Hsiang Chen a , Chien-Pang Lin b,∗ , Li Tian c , Yi Yang c
a
School of Hospitality Business Management, Carson College of Business, Washington State University, Pullman, WA 99164-4742, USA
b
Department of Finance, Chang Jung Christian University, Tainan, Taiwan, ROC
c
School of Business and Tourism Management, Yunnan University, Kunming, 650091, China

a r t i c l e i n f o a b s t r a c t

Article history: This study makes a unique contribution to the hospitality literature by offering a theoretical model of the
Received 17 October 2016 link between corporate giving (CG) and hospitality firm performance based on a duopolistic competi-
Received in revised form 20 April 2017 tion model with rational profit-maximizing hospitality firms. The equilibrium outcomes of the proposed
Accepted 23 May 2017
model explicitly explain the mixed findings of the relationship between CG and hospitality firm perfor-
Available online 9 July 2017
mance found in the previous empirical studies. Specifically, the optimal level of a hospitality firm’s CG
is positively related to the total market demand and the competitive advantage of CG, and negatively
Keywords:
related to the induced cost of giving practices. Moreover, a positive or neutral relationship between CG
Corporate giving
Hospitality firm performance
and hospitality firm performance depends on whether CG could induce a competitive advantage of brand
Duopolistic competition model differentiation and customer loyalty to increase profit.
© 2017 Elsevier Ltd. All rights reserved.

1. Introduction comprises moral, ethical, and philanthropic responsibilities as well

Business research studies have empirically examined the effects
of corporate social responsibility (CSR) on firm performance.
Mishra and Suar (2010) and Rettab et al. (2009) showed the posi-
tive effect of CSR on firm performance. However, Griffin and Mahon
(1997) indicated that CSR may not affect firm performance. Sim-
ilarly, there is no consistent relationship between CSR and firm
performance in the hospitality research literature.
Garay and Font (2012) found a positive impact of CSR on
Spain’s hospitality industry. Kim and Kim (2014) revealed that CSR
strengthening actions enhance shareholder value of publicly listed
restaurant firms, whereas CSR weakening actions reduced share-
holder value. Lee and Park (2009) found no relationship between
CSR and casino firm performance. Inoue and Lee (2011) studied the
financial consequence of CSR behaviors of airline, casino, hotel and
restaurant companies and obtained inclusive results.
As Godfrey (2005) noted, the main reasons for these mixed
results may be the lack of a theoretical model that links CSR
directly with firm performance, and the conceptual ambiguity and
measurement difficulty of CSR. Carroll (1979) suggested that CSR
∗ Corresponding author.
E-mail addresses: ming-hsiang.chen@wsu.edu (M.-H. Chen),
cplin@mail.cjcu.edu.tw (C.-P. Lin), tianwm@ynu.edu.cn (L. Tian),
yanghh1117@qq.com (Y. Yang).
as the responsibilities to earn a fair return for shareholders and
comply with the law. Consequently, different aspects of CSR may
be differently motivated and may therefore have diverse effects on
firm performance (Brammer and Millington, 2008).
Alternatively, this study uses corporate giving (CG) to explain
how CSR can affect firm performance. CG, a specific component of
CSR, is the act of corporations donating a portion of their profits to
nonprofit organizations. The CG practice is generally handled by the
corporation or by a foundation that is created, and thus has a consid-
erable degree of external visibility (Brown et al., 2006). Therefore,
CG offers a transparent insight into corporate operations and man-
agement and can serve as a good quantitative measurement for
CSR.
Empirical studies also found a mixed relationship between CG
and firm performance based on value enhancement theory and
agency cost theory. Value enhancement theory hypothesizes that
CG could be considered as a form of moral capital investment, which
could enhance a firm’s image (Godfrey, 2005) and hence increases
firm value by promoting customer loyalty (Lev et al., 2010). Agency
cost theory posits that managerial insiders are likely to engage in
CG to promote their personal reputation while shareholders suffer
an opportunity loss (Brown et al., 2006).
Lev et al. (2010) showed a positive relationship between CG and
customer satisfaction and suggested that CG is positively associ-
ated with future sales revenue. Brammer and Millington (2008)

http://dx.doi.org/10.1016/j.ijhm.2017.05.003
0278-4319/© 2017 Elsevier Ltd. All rights reserved.
 M.-H. Chen et al. / International Journal of Hospitality Management 66 (2017) 130–134 131

mentioned that firms with high CG differentiated themselves from
those with lower CG to the target consumer and reaped the bene-
fits of consumer loyalty. Seifert et al. (2004) showed no influence of
CG on corporate stock return. In the hospitality research literature,
Chen and Lin (2015a) concluded that CG can enhance hospitality
firm performance in Taiwan.
Moreover, Enz (2009) indicated that the hospitality industries,
such as theme parks, casinos, cruise and airline are often character-
ized by a few very large firms and might be classified as an oligopoly.
As Dwyer et al. (2010) noted, tourism markets often exhibit ele-
ments of both monopolistic competition and oligopoly and it may
be that many tourism markets are oligopolistic in the main but
monopolistically competitive at the edges. Given that the hospital-
ity industry can be classified as an oligopoly, game theory provides a
perfect framework for understanding how hospitality firms interact
in an oligopoly (Varian, 1992).
Accordingly, this study contributes to the literature by provid-
ing a theoretical model of the link between CG and hospitality firm
performance based on a duopolistic competition framework with
rational profit-maximizing hospitality firms. There are two major
results derived from the model. First, the model identifies the opti-
mal level of a hospitality firm’s CG and the relationship between
the optimal level of CG and its determinants. Second, the model
explains whether CG can affect hospitality firm performance and
offers theoretical support to previous empirical findings.
2. The basic model
In this section, a duopolistic framework is used to analyze the
giving behavior of a rational profit-maximizing hospitality firm and
understand the effect of CG on hospitality firm performance. The
model uses two possible cases: no hospitality firm gives to char-
ity (the NN case) and only one hospitality firm gives to charity
(the NG case) to demonstrate how CG can affect hospitality firm
performance.
2.1. The NN case
Assume that there are two competing hospitality firms pro-
ducing and selling a similar hospitality product and service, qnn
i
(the quantity of the competing goods produced by hospitality firm
i (i = 1, 2) in the NN case) is greater than zero (qnn > 0) because
i
both hospitality firms under duopolistic competition enjoy abnor-
mal profits in the long run. The market demand of hospitality firm
i is modeled as:
qnn
i
= a − pnn
i
+ pnn
j
, (1a)
where a − pnn + pnn > 0, a represents a positive parameter of total
i j
market demand (a > 0), pnn is the market price and i = 1 if j = 2 (i = 2
if j = 1).
Assume that both competing hospitality firms use similar man-
agement and technology in supply and thus have the same cost
function. The cost function of hospitality firm i’s supply is defined
as:
cinn = mqnn + fc, (1b)
i
2.2. The NG case
In line with value enhancement theory, the model assumes that
CG produces a socially responsible image (Godfrey, 2005). This
positive image can enhance the competitive advantages of brand
differentiation and customer loyalty (Brammer and Millington,
2008; Lev et al., 2010). As Bhattacharya and Sen (2003) pointed out,
corporate responsible activities may induce customers to increase
their demand for the firm’s products and services.
Therefore, when a duopolistic competing hospitality firm gives
to charity, its market demand is assumed to increase by bg, where
the parameter b reflects the degree of increased demand for hos-
pitality firm’s products and services because of the competitive
advantage of brand differentiation and customer loyalty induced by
CG (the competitive advantage of CG hereafter) and b ≥ 0. The larger
the competitive advantage of CG (higher b), the higher the market
demand for hospitality firm’s goods and service increased. This also
implies that the increase in market demand is proportional to the
size of hospitality firm’s direct giving spending g (g ≥ 0). As only
one duopolistic hospitality firm engages in CG, the market demand
ng
functions for hospitality firm with CG (qg ) and its rival without CG
ng
(qn ) are:
ng ng ng
qn = a + pg − pn , (2a)
and
ng ng ng
qg = a + bg − pg + pn , (2b)
where a > bg.
When a hospitality firm gives to charity, it incurs cost. The total
cost of engaging in CG includes direct giving expenses, human
resource and administrative cost, and agency cost of managerial
misconduct (Wang et al., 2008). The cost of human resource and
administration may not increase linearly because economies of
scale and learning have an effect on managing giving practices
(McWilliams and Siegel, 2001). The agency cost of managerial mis-
conduct results from the giving conflicts between the directors and
managers participating in CG and shareholders. The cost of agency
conflicts is supposed to be minimal at low levels of CG, but they
are likely to become more significant as CG increases (Wang et al.,
2008).
Thus, the model assumes that the cost of CG takes a quadratic
form rg 2 /2, where g is the direct cost of CG, and r (r > 0) represents
the induced cost of giving practices, including human resource
and administrative cost and agency cost of managerial misconduct.
Note that the assumption of rg 2 /2 can also simplify the calculation
process of the results of proposed model. The cost functions for
ng ng
hospitality firm with CG (cg ) and its rival without CG (cn ) are:
ng ng
cn = mqn + fc, (3a)
and
ng ng rg 2
cg = mqg + + fc. (3b)
2
In the NG case, depending on whether the duopolistic hospitality
firm gives to charity, we have two possible profit functions:
ng ng ng ng ng ng ng
n = pn qn − mqn − fc = (pn − m)(a + pg − pn ) − fc, (4a)

where m is a unit marginal cost (m > 0) and fc represents fixed costs and
(fc > 0). Thus, the profit function for each hospitality firm is equal ng ng ng ng rg 2 ng ng
g = pg qg − mqg − − fc = (pg − m)(a + bg − pg
to: 2

inn = pnn qnn − mqnn − fc = (a − pnn + pnn − m)qnn − fc, (1c) ng rg 2

i i i i j i +pn ) − − fc. (4b)
2
where inn
> 0, i.e. (a − pnn
i
+ pnn
j
− m)qnn
− fc > 0, because both
i
ng ng ng
where n ,pn and qn are the profits, market price and demand
competing hospitality firms make abnormal profits in the long run. ng ng ng
of the hospitality firm without CG, respectively, g ,pg and qg
132 M.-H. Chen et al. / International Journal of Hospitality Management 66 (2017) 130–134
represent the corresponding figures for the hospitality firm giving
ng ng
to charity, respectively. Moreover, pg − m > 0 and (a + bg − pg +
ng
pn ) > 0 for the reason that firm under duopolistic competition can
make abnormal profits in the long run.
3. Equilibrium market outcomes
Taking the first-order derivative of the profit function with
respect to price and CG, we can solve for the equilibrium outcomes
of the duopolistic hospitality firm with or without CG. Particularly,
we compute the optimal choice of price level as well as giving
spending and the corresponding profits for the hospitality firms
under duopolistic competition. In the NN case, each of the two
hospitality firms simultaneously sets its optimal price level that
maximizes its own profit in Eq. (1c). The equilibrium market out-
comes are (see Appendix A):
ginn = 0,
qnn
i
= a > 0,
and
inn = a2 − fc > 0.
where ginn
= 0 denotes that neither firm gives to charity, and
a2 − fc > 0 since inn > 0. These equilibrium outcomes serve as the
benchmark for evaluating and comparing with those of the sit-
uation in which only one duopolistic hospitality firm engages in
CG.
In the NG case, hospitality firms with and without CG simultane-
ously set their respective optimal price level. Next, hospitality firm
with CG sets and an optimal amount of CG to maximize its profits
in Eq. (4b). Thus, the market equilibrium outcomes are as follows
(see Appendix B):
12ab
ng
gg = , (6a)
9r − 8b2
9ar
ng
qg = , (6b)
9r − 8b2
and
ng 9ra2
g = − fc.
9r − 8b2
ng
where gg represents hospitality firm’s optimal CG. Given that
hospitality firm operating in duopolistic competition can enjoy
ng ng
abnormal profitability in the long run, qg > 0, g > 0 and hence
2
9r − 8b > 0. Therefore, Eqs. (6a), (6b) and (6c) are also positive.
4. Discussion and conclusion
The mixed relationship between CG (or CSR) and firm per-
formance found in the hospitality research literature is based
on empirical test results with the lack of support for the the-
oretical model. This study provides a theoretical model of the
association between CG and hospitality firm performance based
on a duopolistic competition framework with rational profit-
maximizing hospitality firms. The model explicitly explains the
mixed findings found in the previous empirical studies. The
important results and implications derived from the model are
summarized and discussed as follows.
First, Eq. (6a) indicates that the equilibrium CG of hospitality
firm depends on three factors, which are total market demand
(a), the competitive advantage of CG (b), and the induced cost of
giving practices, i.e. human resource and administrative cost and
agency cost of managerial misconduct (r). To understand the spe-
cific relationship between CG and its determinants, we take partial
ng
derivatives of gg with respect to a, b, and r, and obtain the following
results:
∂ggng 12b
=   ≥ 0, (7a)
∂a 9r − 8b2
∂ggng 12a(9r + 8b2 )
= > 0, (7b)
∂b (9r + 8b2 )
2
and
∂ggng −108ab
=  2 ≤ 0, (7c)
∂r 9r − 8b2
where ∂ denotes partial derivative.
These results suggest that the equilibrium level of a hospital-
ity firm’s CG is positively related to total market demand (a) and
the competitive advantage of CG (b), and negatively related to the
(5a) induced cost of giving practices (r). These findings are in line with
those in the literature that firms with higher total market demand,
(5b)
hence more sales revenue, are under higher public scrutiny and
thus are willing to give more to meet higher social expectations
(Amato and Amato, 2012; Gautier and Pache, 2015). Furthermore,
(5c) as Brammer and Millington (2008) and Wang et al. (2008) noted, a
firm is likely to give more if CG brings higher competitive advan-
tage, but should reduce CG if it incurs more induced cost.
Second, the effect of CG on a hospitality firm’s profits under
duopolistic competition can be shown by performing the following
comparison:
ng 8a2 b2
 = g − inn = > 0, if b > 0 and 9r − 8b2 > 0,
(9r − 8b2 )
(8a)
8a2 b2
= = 0, if b = 0 and 9r − 8b2 > 0. (8b)
(9r − 8b2 )
While Eq. (8a) reveals that CG generates more profit for hospi-
tality firm with CG if b > 0 and 9r − 8b2 > 0, Eq. (8b) suggests that
CG may not generate more profit for hospitality firm with CG if b = 0
and 9r − 8b2 > 0.
To present the relationships among b, r, and , we use a
(6c) numerical simulation to explain the effects of b and r on . Note
that according to Brammer and Millington (2008), the listed hotel
and leisure companies in the UK spent about 0.01% of their sales rev-
enue on charitable donations over the period from 1990 to 1999.
Chen and Lin (2015b) found that the listed Taiwanese hospitality
companies gave about 0.05% of their sales revenue to charity during
the period from 1996 to 2011. Given evidences above, we further
assume a = 1 and 0 ≤ b < 2 to obtain a reasonable range for r and
provide a simple and clear numerical simulation. The results of the
simulation based on Eqs. (8a) and (8b) are shown in Fig.1.
Fig. 1(a and b) demonstrates that when the level of the induced
cost of CG (r) is below a certain point, CG with competitive advan-
tages of brand differentiation and customer loyalty (i.e. b ≥ 0) has
a positive effect on the profit of hospitality firm with CG. In other
words, firm giving more to charity has a higher profit than its rival
as the higher level of CG generates more differentiation competi-
tiveness. The hospitality firm thus has an incentive to engage in CG
to enhance its firm performance. This result provides the theoret-
ical ground to support the empirical finding that CG (or CSR) has
a significantly positive effect on firm performance (Brammer and
Millington, 2008; Chen and Lin, 2015a; Porter and Kramer 2002;
Wang et al., 2008).
Nonetheless, as shown in Fig. 1(b and c) ,  = 0 when b = 0. Fur-
thermore, when r exceed to a certain point, an increase in b through
CG actually have no impact on hospitality firm performance ().
 M.-H. Chen et al. / International Journal of Hospitality Management 66 (2017) 130–134 133

Appendix A. The equilibrium market outcomes in the NN

case

According to Eq. (1c), the two duopolistic hospitality firms under

price competition maximize their respective profits simultanously:

max inn = pnn

i
qnn
i
− mqnn
i
− fc = (pnn
i
− m)(a − pnn
i
+ pnn
j
) − fc.
pnn
i
(AI-1)

The first order and second order conditions of the profit function
with respect to its corresponding prices for hospitality firm i can be
written as:
∂inn
= a + m − 2pnn
i
+ pnn
j
= 0, (AI-2a)
∂pnn
i

and
2
∂ inn
= −2 < 0. (AI-2b)
∂pnn
i
2

Thus, the solution to the first order condition gives the profit-
maximizing price for each hospitality firm:

pnn nn
1 = p2 = a + m > 0. (AI-3)

We can solve for the equilibrium market demand and profits

for each hospitality firm by substituting Eq. (AI-3) into the demand
function in Eq. (1a) and profit function in Eq. (AI-1):

qnn nn
1 = q2 = a > 0, (AI-4)

and

1nn = 2nn = a2 − fc > 0. (AI-5)

Appendix B. The equilibrium market outcomes in the NG

case

Based on Eqs. (4a) and (4b), the two duopolistic hospitality firms
without and with CG simultaneously maximize their respective
profits under price competition:
ng ng ng ng
max n = (pn − m)(a + pg − pn ) − fc, (AII-1a)
ng
pn

and

ng ng ng ng rg 2
max g = (pg − m)(a + bg − pg + pn ) − − fc. (AII-1b)
Fig. 1. Numerical simulation: b, r and . ng
Pg 2

The first order and second order conditions of the profit func-
tions for each hospitality firm with respect to its corresponding
These offer a theoretical explanation for another finding that no price can be written as:
association between CG (or CSR) and firm performance (Griffin and
∂nng ng ng
Mahon, 1997; McWilliams and Siegel, 2001; Lee and Park, 2009). = a + m + pg − 2pn = 0, (AII-2a)
Therefore, the simulation results based on Eqs. (8a) and (8b) pro- ∂png
n
vide explanations for reconciling the inconsistent results in the
∂ nng
2
literature that while CG may positively impact hospitality financial = −2 < 0, (AII-2b)
performance, it could also have no effect. ∂png
n
2

and
∂gng ng ng
Acknowledgement = a + m − 2pg + pn + bg = 0, (AII-2c)
∂png
g

The partial financial support for this research project was pro-
∂ gng
2
vided by Carson College of Business, Washington State University = −2 < 0. (AII-2d)
(2016 Summer Research Grant). ∂png
g
2
134 M.-H. Chen et al. / International Journal of Hospitality Management 66 (2017) 130–134

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