The American Revolution started with a boycott of English tea, and the boycott of Montgomery buses was a key event in the civil rights movement. Not only are boycotts integral to American history, but they are also a very popular form of political engagement: 38% of Americans are currently boycotting at least one company.  Boycotts are becoming popular also in the investment world, in the form of divestment:  when Morningstar started ranking mutual funds based on their sustainable investing criteria, $24 billion flowed into “high sustainability” funds and $12 billion flowed out of “low sustainability” funds (Hartzmark and Sussman, 2019). What are the welfare consequences of these boycotts and divestments? How do they compare with other forms of political engagement at the corporate level?

In a recent paper we try to answer these questions.  For concreteness we focus on the case of an environmental externality, pollution. We assume that a fraction of the population is “socially responsible” in the sense that these individuals put a positive weight (the social responsibility parameter) on aggregate welfare when they make decisions. We study the welfare consequences if these socially responsible stakeholders exercise their exit option (divestment or boycott) or their voice one (engagement).

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