Firms' ethics, consumer boycotts, and signalling

This paper develops a theory of consumer boycotts. To affect a firm's ethical behavior, moral consumers refuse to buy from an unethical firm. Consumers who do not care about ethical behavior may join the boycott to (falsely) signal that they do care, increasing the disciplinary power of consumer boycotts. In the firm's choice between ethical and unethical behavior, the optimality of mixed and pure strategies depends on the cost of producing ethically. In particular, when the cost is (relatively) low, ethical behavior arises from a prisoners' dilemma as the firm's optimal strategy.