Impact Investing and Social Entrepreneurship under Imperfect Monitoring

We develop a theory of impact investing and social entrepreneurship under imperfect monitoring. A socially minded watchdog sets mandated standards in the presence of limited oversight, while a profit-maximizing financier contracts with entrepreneurs who may hold social preferences. When monitoring is effective, regulation binds and socially responsible behavior is cosmetic: equilibrium actions just comply with the mandate regardless of who is financed. When monitoring is weak, the financier hires socially minded entrepreneurs and induces over-compliance, extracting rents from their social preferences. The model characterizes how monitoring efficiency and entrepreneurial values jointly shape equilibrium behavior, entrepreneurial financial returns, the prevalence of impact investing and social entrepreneurship, and welfare. We also discuss empirical implications, paths to empirical engagement, and implications for entrepreneurs, financiers, and institutional design.

Duke Scholars

Author David T. Robinson Fuqua School of Business