buddhist investment criteria by manoje

Manoje Prutthisathaporn 4904640481

Establishing Buddhist Investment Criteria

: The analysis through Product Differentiation Theory and the Case Study of Thailand SET 50 Index

1. Introduction

1.1 Background

In Milton Friedman's classic article, The Social Responsibility of Business is to Increase its Profits, he wrote in 1970 in his stockholder theory of corporate moral responsibility that a corporation's only

moral responsibility was to promote the financial well-‐being of its stockholders (McAleer, 2003). It is evident that business world, particularly the United States, is currently moving toward his theory since a vastly variety of corporations has increasingly adopted his principle. Numerous companies

are creating an energy-‐efficient product, racing to be greener than one another, attempting to be perceived as a good, reliable firm, and improving environmental and working conditions. For instance, most players in automobile industry have substantially expanded the production of hybrid

car, massive farming firms have adopted an organic farming, and consumer goods’ manufacturers considerably have labelled their products noting on energy usage. This strengthens the belief that profits and principles are not mutually exclusive and investment industry is no exception.

Ethical investment was born out of a dream to be an alternative investment for people who desire to

invest in what they believe. They pay attention not only to the number of risk and return, but also to where their money goes. Ethical investment is defined as putting your money where your morals are, or investing according to your beliefs (Fehrenbacher, 2001).

To respond to a variety of belief around the world, various types of ethical investments have been

initiated, which in fact fall into the three classifications – religious investment, green investment, and socially responsible investment. Firstly, funds with religious investment consist of Catholic fund, Islamic fund, and Jewish fund. The main focus of catholic fund is on life ethic, which rules out

investments in companies participating in abortion. Companies whose products or services violate the Catholic Church’s teachings on a consistent life ethic, including contraceptives, embryonic stem cell research, and abortion-‐related products and services are also excluded. The most famous

catholic fund is Christian Brothers Investment Services, Inc. (CBIS) which is the leader in Catholic socially responsible investing. CBIS possess approximately $3 billion in assets under management for over 1,000 Catholic institutions worldwide, including dioceses, religious institutes, educational

institutions and health care organizations. Next, Islamic funds exclude engagement in what Islamic laws prohibit, including alcohol-‐related activities, conventional banking services, entertainment and gambling, life insurance, and pork-‐related products. Its main difference from other ethical funds is

the prohibition on interest-‐based transactions and finance. As a consequence, allowance of limited debt has protected Islamic community from investment losses in the past, particularly during crisis period. The last religious fund is Jewish fund. Under Jewish teaching, investors should feel responsible for the harm done to others by the companies whose stock they own. The prohibition incorporates no profit from forbidden activities, especially those generating pollution or exploiting

labor force, and no ownership of assets that cause others harm. The manager of Jewish fund is likely to involve the process of positive engagement with corporations in order to raise their general ethical standards.


The second classification of ethical investment is green investment. The major characteristic of green investment is a pursuit in an environmentally-‐oriented investment policy. Funds with green

investment usually use company’s impact on the environment or its effort to minimize this as their principal criteria. Data from Fintactica, a US independent research and analysis, disclosed that green funds available in the US in 2004 held a lot of mainstream businesses with a good record in

environmental activities in their portfolio, including Microsoft, AIF, Coca Cola, and Wells Fargo.

Lastly, socially responsible investment (SRI) is investment which allows investors to take into account wider concerns, such as social justice, economic development, peace or a healthy environment, as well as conventional financial considerations, according to The Association for Sustainable &

Responsible Investment in Asia. It holds negative screening to exclude firms violating its principle and actively seeks out firms which make a positive contribution to society. Most SRI funds are constructed by using environmental, social and governance (ESG) factors as selection criteria,

including clean and renewable energy, environmental friendly management, workplace practices and labor standards, ethical policies, and corporate governance and transparency.

SRI is an increasingly popular field of investment, particularly in Europe and North America. Celent Financial Consultancy reported in 2007 that the market of SRI grew from 1 trillion euro in 2005 to 1.6

trillion euro in 2007 distributed across 451 SRI funds in Europe. The trend is predicted to be continuous upward in Europe and the situation is similar in the United States. In 2007, SRI funds accounted for 11 percent of $25.1 trillion in total assets under management in US mutual fund

industry according to Report on Socially Responsible Investing Trends published by Social Investment Forum. The report also revealed the growth rate of 18 percent in total assets under management using socially responsible investing strategies, increasing from $2.29 trillion in 2005 to $2.71 trillion.

Ethical investments also vary in the levels of commitment but some ethical funds might combine different methods. The simplest way is screening -‐ the inclusion or exclusion of stocks and shares based on ethical ground – which can be either negative or positive. With negative screening,

companies are excluded from the investment because of their involvement in certain activities which are judged such negativity as heavy polluters, arms companies, and animal testers. In contrast, positive screening helps select companies with superior social or environmental

performance.

The second level is engagement. According to Ethical investment research services, with engagement, fund managers actively encourage companies to adopt social and environmental best practices. This can involve meetings with senior management and voting at relevant annual general

meetings. Many of the larger ethical pension funds tend to concentrate solely on engagement.

The last level is called community investing, as known as social venture capital. It is the investment of money into community developments that contribute to the growth and well being of particular communities (Carla, 2007). For instance, the Grameen Bank of Bangladesh by Nov 2000 had already

lent $3.2 billion to over two million people. Among them, 90 percent were women who were classified as very poor with a repayment rate of 98 percent.

Table1 SRI -‐ related funds in Asia in May 2008

Private Equity SRI Pension Faith-‐based Total


Country Public Funds Mandates China 2 0 0 0 2 Hong Kong 19 0 0 1 20 Japan 59 1 0 0 60 Korea 37 2 6 0 45 Taiwan 3 0 0 0 3 Singapore 3 1 0 10 14 Malaysia 2 0 0 81 83 Indonesia 0 1 0 1 2 India 1 1 0 1 3 Thailand 2 0 0 1 3

Source : Association for Sustainable & Responsible Investment in Asia (ASrIA)

Situation of ethical investment funds in Asia is summarized in the table1. The leaders of SRI-‐related

funds in Asia are Malaysia, Japan, and Korea, all of which are developed countries, while developing countries like China, Thailand, India, and Indonesia have a few numbers of ethical funds.

The three Thai ethical funds shown in the table1 comprise MFC Environmentally and Socially Responsible Investment Fund, MFC Invest Global Agribusiness Fund, and MFC Islamic Fund. In other

words, two SRI funds and one religious fund have been launched in Thailand. The first SRI fund in Thailand, MFC Environmentally and Socially Responsible Investment Fund, aims to generate sustainable returns as well as to support companies that gave a priority to social investment. Firms

are screened on their policies to protect the environment and promote social awareness and a third party standard based on ISO 14000 compliance as well as the corporate governance standards set by

the Stock Exchange of Thailand are applied. Secondly, MFC Invest Global Agribusiness Fund is the first fund focusing on Agricultural Business in Thailand. The fund invests only in investment units of DWS Invest Global Agribusiness Fund investing in global agricultural business managed by Deutsche

Asset Management. Lastly, the investment of MFC Islamic Fund is determined Religions Advisory Board, as known as Shariah Committee, consisted of distinguished members of the Thai Muslim community who are knowledgeable about Islamic law and principles. The fund not only excludes

companies that do not engage in prohibited businesses, but also establishes financial criteria for investee companies, specifying the maximum allowance of the ratio of total debt, of the sum of interest securities, and of account receivable.

Table2 Total value of mutual fund industry in Thailand, from 2002 to 2008

Item/Year 2008 2007 2006 2005 2004 2003 2002 Asset Management Company 21 21 18 18 17 14 14 Total Assets 1,105 910 808 683 526 429 346 Total Asset Value (Billion Baht)

1,533 1,610 1,222 962 681 720 435

Source: Association of Investment Management Companies (AIMC)

The table2 demonstrates the whole picture of mutual fund industry. The total asset value managed

by mutual funds in Thailand increased by more than three times from 2002 to 2008. This data illustrate the attractiveness of mutual funds to Thai people, resulting in their continuous upward rising trend.


1.2 Problems

A large number of diverse ethical investment funds with their standard have been initiated and gained a huge attention from public. Nevertheless, A very few funds with Buddhist investment have

been founded as Buddhist investment criteria have never been constructed even though Buddhism is the world's fourth largest religion in terms of number of adherents. One of them is Nirvana Investment. Its website describes itself as Buddhist private investment company based on

transparent ethical principles which seeks solid return for its investors with the ultimate goal of supporting Buddhist organizations. Its criteria of investments and equity selections have not been, however, fully developed to be so professional that other investors can adopt.

Of Thai population, 97 percent is Buddhist. Corporate social responsibility and Sufficiency Economy

is widely recognized by numerous public and private organizations as a balanced alternative development approach. In addition, Buddhist Economics has increasingly gained attention from scholars as Buddhist principles are scientifically studied and acknowledged that they do not to

contradict to economics theory.

In short, the uprising awareness of sustainability and environmental and societal concern is obvious in Thai society, implying the lack of alternative in investment industry responding to their religious beliefs.

1.3 Theory

The analysis and development of this paper mainly rely on two economic theories; Buddhist

economics and Product differentiation theories. Buddhist economics was first introduced in Chapter 4 of E.F. Schumacher’s book “Small is Beautiful” in 1973. Thereafter, the concept has been elaborated by many well known scholars all over the world. Schumacher (1989) believed that “Study

of Buddhist economics could be recommended even to those who believe that economic growth is more important than any spiritual or religious value.” The aim of Buddhist economics is to correct

unrealistic assumptions of mainstream economics. For instance, work is always disutility, human nature is to only compete, money is proxy, and maximum consumption is an end of everything. In conclusion, the study of Buddhist economics provides a better understanding of economics with

human nature to explain human behavior as a social science.

Buddhist economics is defined as the subject explaining economic activities with the aim for both individuals and society to achieve peace and tranquility under resource constraint (Puntasen, 2004). It is derived from the lesson of the Buddha’s discoveries on his path to enlightment (Prayukvong,

2006).

The concept of Right Livelihood was employed as Schumacher’s main theme to develop his counterarguments against mainstream economics and to articulate Middle Way between modern growth and traditional stagnation. Right livelihood means avoiding any means of livelihood that

involves harm or exploitation of others (Bogoda, 1994). The Buddha mentioned five specific kinds of livelihood which brought harm to others and were therefore to be avoided (Bodhi, 1994). They are dealing in weapons, in sale of flesh or being connected with the raising and killing of animals and in

meat production and butchery, in trading in living beings, including slavery and prostitution, in poisons or drugs, and in producing or selling liquor.


The main idea of Buddhist economics is simplicity and non-‐violence. Every economics activity must not harm oneself or others. The underlying reason is the interconnected aspects of human existence

-‐ human, society, and nature -‐ which are correlated, coordinated, and complemented with each other within the ecosystem. To follow this principle, production must generate no negative product or action. Through production even though new things are created, it is merely changes of state.

Production is, therefore, justified when the value of the things produced outweighs the value of those destroyed. To minimize an adverse impact on environment, non-‐renewable goods, if used, must be used only when they are indispensable and with greatest case and meticulous concern for

conservation (Schumacher, 1989). Also, waste should be kept at its minimum level and utmost attempt to improve nature and environment should be prioritized. Furthermore, mind plays a crucial role in production process since it is considered as a powerful factor of production. The supreme

factor of production is the ability to understand everything by and in its own nature, used to control all factor inputs (Prayukvong, 2006). Employment justified in Buddhist economics is to give a man a chance to utilize and develop his faculties, to enable him to overcome his ego-‐centeredness by

joining with other people in a common task, and to bring forth the goods and service needed for a becoming existence (Schumacher, 1989). Work and leisure are complementary parts; both of them can lead to joy. To sum up, production process should be done in such a way enhancing good quality

of human input.

Buddhist economics considers the ethical value of wealth by the ways it is obtained and the way it is used. The activity on which consumers spend their wealth is consumption. In Buddhist economics, consumption is to maintain good physical and mental health and to generate and accumulate of

wisdom. It is only a mean to an end, not an end in itself, and must be balanced to an appropriate amount to attain well – being, resulting in forming a basis for the further development of human

potentialities. Maximizing satisfaction through consumption, many people damage their own health and harm others. If satisfaction is sought in things that do not enrich the quality of life, the result often becomes the destruction of true welfare, leading to delusion, intoxication, and loss of health

and well-‐being (Payutto, 1994). In short, only moderate consumption with the right amount is essential to realize the true well-‐being.

In realistic world, where none of the market is perfectly competitive, products can be differentiated in different ways. Most consumers, in fact, differ in their taste. With horizontally differentiation,

firms have to decide how best to serve different types of consumer and offer products with different characteristics but similar qualities that appeal to each group.

In a location (spatial) model, firms view some products as closer substitute than others. They compete with them more vigorously than those that consumers perceive as less close substitutes.

The model is based on two main assumptions. First, each firm’s product has a particular location in geographic or characteristic space. The closer two products are, the better substitute they are. Second, consumers have locations in geographic or product space (Carlton, 2004). They prefer

products that are close to their preferred types.

In a monopoly market, a monopolist decides how best to supply consumers and consumers are distributed uniformly along a street z. To purchase a product, consumers pay the price, denoted by p and incur transportation cost t per unit of length. They buy exactly one unit provided that a price

plus transport costs is less than their reservation value, denoted by V. The best location for a firm to


minimize consumers’ transportation cost is the middle. Given the price and middle location, consumers at the ends of the market incur highest cost. In the exhibit1, all consumers within

distance x1 to the left and right of the shop buy the product.

Exhibit1 Location model with a monopolist

If the monopolist wants to target all consumers along the street, the highest price, denoted by p*, they can charge is p such that p* + t/2 must be no greater than V. Thus, p* = V – t/2

Two stores with the same marginal cost selling the same physical good are located at the extremes

of the city. Consumers living at x incurs a cost of tx to go to store1 and a cost of t(1-‐x) to go to store2. They derive their consumer surplus from the gross of price and transportation costs. A consumer who is indifferent between the two firms is located at x where

p1+tx= p2+t(1-‐x)

Therefore, given p1 and p2, demanded for firm1 and firm2 is

D1(p1,p2)=x = (p2-‐p1+t)/2t and D2(p1,p2)=1-‐x = (p1-‐p2+t)/2t

Firm i’s profit is πi = (pi-‐c)(pj-‐pi+t)/2t.

To maximize profit, the first-‐order condition for firm i is pj+c+t-‐2pi=0 Hence, the competitive price

under product differentiation is obtained: pi=pj=c+t

When t increases, both stores charge higher price. Firms only compete directly with others near them since consumers incur higher cost to move their position. In other words, they compete less for the same consumer as the consumer values proximity. As a result, they gain monopoly power

allowing them to increase price. In conclusion, the higher transportation cost is, the more differentiated products are.

Additionally, an outside good, or an undifferentiated product competitively supplied by another industry, can be added to the location model to study the industry where there is an indirect

competitor. Utility from outside good less its price is o. Customer may decide to buy the outside good if it gives more net utility. A customer’s location, L*, represents customer’s most preferred

type of goods and u denotes the utility the consumer obtain from spending at L*. The pleasure a consumer gets from consuming a product in the market located at t is


U(L,L*) = u – t│L -‐ L*│

Each consumer attempts to maximize consumer surplus: U(L,L*) – p. Customers only buy a commodity of the best-‐buy firms in the field if its surplus exceeds the surplus they gain from

consuming the outside good.

max [U(Li,L*) – pi] ≥ o

The greatest surplus the customer can obtain from a product in the industry occurs when he purchases at the location of t*, causing no transportation cost. Maximum surplus he can acquire is, therefore, u – p* where p* is the price of a product located at t*. He is willing to buy a product in the

industry only if its surplus is greater than that from outside good: u – p*≥ o. Then the reservation price can be derived: v = u – o. It represents the highest price the consumer is willing to pay for a product in the industry.

The location model has a much richer application as a model of product differentiation where

location can be thought of in time -‐ departure times of planes, buses, or trains – or in product’s design or variety. When location represents degree of preference, transportation cost denotes a utility loss from not consuming their preferred commodity.

1.3 Literature review

A lot of papers have studied the association between Buddhist Economics and business. Zsolanai

(2009) proposed in his book that Buddhist economics was not a system but a strategy, which could be applied in any economic setting and provided a rational, ethical, and ecological value background, which promoted happiness, peace and permanence (Zsolanai, 2009). Wanna Prayukvong (2007) did

an in-‐depth research on Thai entrepreneur called Asia Precision. The owner of Asia Precision adopts Buddhist Economics approach and encourages the employees to follow. The result is amazingly

successful. With the implementation of institutional environment, peacefulness, positive satisfaction, happiness, and trust occur in Asia Precision while its financial performance is superior. Besides the case study, the author also argued that corporate social responsibility activities did not

shift the paradaigm of self-‐interest of capitalism. In Japan, buddhist economics has been recommended by a former President of the Japanese Miyazaki Bank since 1997 as a novel approach to economic management that is an appropriate middle path between capitalism and socialism.

Numerous scholars have researched a fund and its industry with the approach of product

differentiation framework. Becchetti and Solerino (2005) produced several working paper series in 2005 for Center for European Integration Strategies regarding this field. The model of horizontal product differentiation where a zero profit socially concerned producer and a profit maximizing

producer compete over price and socially and environmentally responsible feature is analyzed. Their study concludes that ethical producer’s entry has positive indirect effects on aggregate social and environmental responsibility since the incumbent finds it optimal to imitate when consumers'

perception of ethical cost is sufficiently high (Becchetti,2005). Hortacsu and Syverson (2004) applied product differentiation theory to analyze the case of S&P 500 Index Funds with a focus on dissimilar search cost. Shuging li (2005) purported a research on product differentiation and fee competition in

the mutual fund industry. According to these two literatures, despite a large number of players offering nearly homogenous return pattern of funds and severe competition, mutual funds can


charge unequal fee by differentiating from each other, resulting in positive profit, as a result of imperfect measures of quality and reasonable magnitudes of search costs. Barracchini (2007)

proposed a model of portfolio selection with additional index besides risk and return indexes where an investor was rational, ethical, and adverse to the risk. The selection process based on ethical principles of an investor is demonstrated.

In conclusion, numerous studies prove the practicality and accomplishment of applying Buddhist

Economics to business world. Investment fund industry is differentiated in many characteristics despite its severe competition, resulting in unequal fee each fund charge. One method to differentiate a fund is with ethical or social responsible feature, responding to some customers'

preference.

Nevertheless, the link between Buddhist economics and investment criteria has never been developed. As a result, no application of Buddhism principle to ethical feature of investment fund has been initiated. This is the gap this paper attempts to contribute.

1.4 Statement of the problem

The questions this paper aims to discuss are how the applicable criteria of investment fund based on

Buddhist economics is designed and how the characteristics of Buddhism investment differ from those of mainstream investment. Through the analysis and the development in this paper, an investor or a fund manager who want to select a firm to invest according to Buddhist economics

would be beneficial. The author believes that Buddhism investment yields in total more utility to some customers than mutual fund even though its return is lower, and the return of Buddhism investment is greater than that of government bond. Buddhism investment is, consequently,

supposed to be practical and satisfy some consumers’ preference.

1.5 Objective and Methodology

This paper aims to establish practical Buddhism investment criteria and then to illustrate the utility people gain from Buddhism investment fund and from mainstream mutual fund. At first, the paper

will seek out the principles of Buddhist economics that can be tracked to construct investment criteria. Then the benefits of Buddhism investment will be explored. In the next section, Buddhism and mainstream investment would be modeled by Product differentiation theories. The conditions

that Buddhism investment has to satisfy will be constructed. Eventually, a case study of SET50 will be researched to analyze the possibility of Buddhism investment and evaluated the hypothesis. The author will rely on the criteria established to screen the firms in SET50 and compare the return with

SET50 index.

Within the above described framework, this paper is divided into eight sections (including introduction and conclusions). The second section analyzes Buddhist economics theories to seek out the principles that can be applied to design a benchmark identifying firms that fail to meet and the

ones that satisfy. The benchmark help exclude a firm that violate Buddhist principle and select a firm with a superior performance. The third section explores externality framework to illustrate the negative effect of mainstream investment on society and the benefit of Buddhism investment. In the

fourth section, the model of Buddhist horizontally product differentiation in investment market where a mainstream investment firm and a firm with Buddhist investment offer different


characteristics of funds to attract consumers is considered with a derivation of demand for Buddhist investment fund and for mainstream fund. The fifth section applies the model a case study of

Thailand SET50. Firms in Thailand SET50 index will be evaluated and the established criteria will be simplified to screen out negative firms with limited available information. Then the five -‐ years monthly return of selected firms will be collected to find their average return and standard

deviation. Also, the weighted average of the selected firms’ returns according to their market value will be computed and then compared with SET50 index. The 5 years return of the government bond will be, eventually, considered to justify the return of Buddhist investment.

2. The establishment of Buddhist investment criteria

Buddhist economics discussed in the first section can be summarized into six main points as

following. There are five prohibited activities Buddha mentioned, an economics activity must not bring harm to others, society, or environment, the main goal of consumption is to enrich the well – being, business prioritization is to improve nature and environment, the value of creation in the

production process must outweigh the value of what is destroyed, and a job must give workers a chance to increase their potential and satisfaction. The investment criteria designed in this section correspond to these six issues and are outlined according to the level of ease and complexity. The

excluded criteria that screen out a negative firm will be constructed first whereas the selection process that screen in a superior firm will be discussed later in this section. The first two criteria are negative screening and a firm’s profound information is not required. To be more comprehensive,

the third criterion which is a negative screening requires investigation of a firm. The last three criteria which attempt to distinguish a firm following Buddhist Economics are, eventually, to be identified with an in-‐depth study on individual firm.

Firstly, the obvious activities violating Buddha teaching are those dealing in weapons, in sale of flesh or being connected with the raising and killing of animals and in meat production and butchery, in trading in living beings, including slavery and prostitution, in poisons or drugs, and in producing or

selling liquor. Companies or industries engaging in these five harmful activities are definitely excluded.

Secondly, firms whose production process or product brings harm to consumers, other people, society, or environment, must be excluded. Under economics framework, they generate negative

externality. Three questions have to be identified; whether a firm is in an industry that generates pollution, whether a firm’s product upholds violence, and whether a firm sells a product that damages consumers’ physical or mental health or environment.

Thirdly, the issue of relation with customers is crucial. First, a firm must not exploit consumers and

deal with them fairly. Second, its product must be safe and not deceptive. The number of consumers appealing or filing the company in the problem of quality of goods or service contact should be taken into account.

Fourthly, the inclusion of a firm depends on conservation of energy and natural resources and

environment improvement. An attempt to improve nature and environment should be obviously prioritized. Minimization of non – renewable goods is significant in Buddhist economics. If they are used, it must be in case of the fact that they are indispensable and with greatest method of

conservation. A firm corresponding to the following two concerns is unconditionally in favor; a firm


whose core business enriches the environment and a firm without the non – renewable input or with an excellent record of a substantially declining usage of non – renewable goods.

Fifthly, a firm creating a high value – added product is strongly preferred. Since the creation of final

goods comprises the destruction of various inputs, a firm whose production procedure relies on the least amount of resources destroyed to maximize the value of a final product shall get supported. The proportion of the value of total inputs in the value of an output is advantageous.

The last element to is working condition. Firms must not exploit their labor. Instead, firms must

ensure that the nature of a job they assign to their employee both enhance their potential and well-‐being and afford them a sense of satisfaction. These are two employment criteria a firm has to satisfy. The turnover rate is an indication of how a firm treats its employee, how the nature of a job

that employees are assigned is, and how employees feel while working with a firm.

These six criteria are summarized in the exhibit2 to describe step-‐by-‐step to establish Buddhist investment criteria.

Exhibit2 The establishment of Buddhism investment criteria

3. The analysis of externality of Buddhist investment

An externality occurs when a person’s well-‐being or a firm’s production capacity is directly affected by the action of other consumer or firms rather than indirectly through changes in prices (Perloff, 2004). If someone’s consumption or production activities hurt or help other outside a market, it

causes externalities. A market with negative externalities is illustrated in the left diagram of the exhibit3 whereas the right diagram of the exhibit3 demonstrates a market with positive externalities.


Exhibit3 Market with externalities

In both markets, a competitive firm produces at competitive output, qc, by equating marginal cost, MC, with firm’s demand, D, derived from marginal benefit, MB, consumers gain. This competitive optimum does not, nonetheless, maximize social welfare since an indirect benefit or cost to a third

party is not taken into account. To generate social optimal output, qs, equilibrium must be where marginal social benefit, MSB, equals marginal social cost, MSC. MSC is the cost of manufacturing one more unit of goods plus the additional externality damaging others while MSB sums the direct

benefit to consumers buying a product with the positive externality benefiting others. Negative externality is denoted by marginal external cost, or MEC, whereas marginal external benefit, or MEB, represents positive externality. On the left side of the diagram, competitive market produces

excessive negative externalities because the firms’ private cost is less than their social cost. Last unit of output yields more additional cost than additional benefit. Conversely, a firm in the right market of the exhibit3 considers only demand for its product without realizing someone outside the market

benefiting from its production. To enhance social welfare, the firm should expand its output. To sum up, because of externalities, the competitive market equilibrium does not maximize welfare.

With Buddhist investment criteria, the amount of investment is not allowed to flow to a firm with a creation of negative externality. Instead, a firm with positive externalities receives a financial

support to boost its production. Only a firm creating indirect benefit to a society is provided with more of capital, resulting in an upward shift in marginal curve. This leads to an increase in production and output. Conversely, a firm with negative externalities encounters a more difficulty in

acquiring a fund. Its marginal cost shifts to the left, causing a drop in output. As a consequence, a social welfare increases and a market equilibrium moves closer to a socially optimal point as shown in the exhibit4. The new competitive optimum is closer to the social optimum than the original one.

Exhibit4 The impact of Buddhist investment on externality market


In short, Buddhism investment alleviates the externality problem leading to market failure, making

society better off and indirectly enriching the happiness of consumers following.

4. Buddhist Product Differentiation Model

Most of the assumptions in the model are standard assumptions in the product differentiation literature. The model features are outlined by defining producers, market space and consumers. In the production side, there are two investment firms in the market; a mainstream firm offering a

return – maximizing investment fund and an ethical firm providing a Buddhist investment fund. These two firms have the same marginal and fixed cost and charge a customer nothing, meaning no fee is collected. A return each fund performs represents a price a normal firm charge. Given all other

characteristics being equal, a customer purchases the one with higher return. The higher return a fund makes, the lower the price consumers perceive.

The establishment of the ethical firm with its Buddhist investment fund into the market generates a new market space along a Buddhism segment with unit length for simplicity and without lack of

generality. Location on the left extreme corresponds to the choice of selecting a firm in which only risk and return are taken into account while the extreme right side of the market represents the choice of a screening process which strictly follows Buddhist economics. Within these two extreme

choices, both firms dispose of a set of strategies in buddhism – a where a ∈ [0,1] allowing them to locate in any point of the segment if they want. The set of strategies in Buddhism, ranging from zero to one, corresponds to different level of engaging Buddhist economics into selection process.

In the demand side, consumers have inelastic, unit demands, and heterogenous preference on

Buddhism and they are uniformly distributed across the line segment [0,1]. Each consumer’s position in the interval represents individual perception of the Buddhist value of a fund. Consumers who choose a fund exactly corresponding to their preference incur no cost. Also, consumers who buy a

fund offering higher level of Buddhist in selection than their preference experience zero cost since what they consume is above their satisfied standard. Thus, the cost of moving along the line segment is positive only for those going from a more Buddhism to a less Buddhism point as they go to the location which is below their satisfaction level. This explains why costs are increasing only in the distance between consumer and the location of return – maximizing investment fund for consumers buying from the mainstream investment firm.


Consumer utilities are increasing in fund’s return level and decreasing in the distance between consumer’s Buddhism stance and the Buddhism value incorporated in the purchased fund. The

welfare of a consumer located at x is

rI – Vp -‐ t(x-‐a) for x-‐a ≥ 0 or rI – Vp for x-‐a<0

where V p is the consumer reservation value, or a minimum return he is willing to obtain in case of zero costs of Buddhist distance, rI is the return performed by the i-‐th fund, and t represents the cost of utility loss per unit of distance from his Buddhist stance. In this model, consumers care only for

downward deviations from their preferred point. In case of uniform return, a fund located in a=0 would be weakly preferred to one located at the right by all consumers. Each consumer attempts to maximize consumer surplus:

max {rI – t(x-‐a) for x-‐a ≥ 0, rI for x-‐a<0}

Funds, as a consequence, tend to move rightward to attract more consumers since it reduces

consumers’ utility loss from consuming the product with less satisfaction of Buddhist feature if the location is mobile.

To elaborate the model in a visual way, the market with only one fund is demonstrated first and then the complete version of the model with the two firms mentioned above is explored later. In the

exhibit5, there is only one fund located at a=0.5, offering a return of r. V is the consumer reservation value and t represents utility loss per unit of distance from his Buddhist stance.

Exhibit5 Buddhist horizontally product differentiation model with only one goods in the market

The line originating from the point r has a function of r – tx. Its slope is determined by the cost of utility loss per unit of length. The line between the fund and the extreme left is horizontal, expressing the level of utility consumers receive without utility loss while the line for the other half

of the market is downward – sloping because of the fact that the farther a location away from the fund’s stance is, the greater utility loss occurs. Higher utility loss per unit of length would lead to a less number of buyers, implying considerable level of differentiation. Consumers would consume

the fund as long as their utility from consuming less the utility loss, if occurs, exceeds their reservation value. The consumers in the market are divided into three cases. First, consumers located between extreme left and the middle have lower level of Buddhist than the stance of the

fund and, therefore, incur on utility loss and consume the fund. Conversely, the other half of the


market purchasing the fund would encounter utility loss since their Buddhist preference exceeds the level the fund performs. Despite some utility loss, the ones located between the middle and x1 still

buy the funds. Lastly, those rejecting the fund are located to the right of x1 since their net utility from selecting the fund is below their reservation value. Accordingly, demand for the fund is equal to x1

With an inflexible location, a return -‐ maximizing investment fund presented by a mainstream firm is

fixed at a=0 whereas a=1 is the location of a Buddhist investment fund of an ethical firm providing. A consumer who is indifferent between these two funds is located at x2 where

r r– Vp -‐ t(x2-‐0) = rb – Vp which can be rearranged to be rr – t x2 = rb

where rr is the return of return -‐ maximizing investment fund and rb is the return of the Buddhism investment fund. A consumer will prefer the return -‐ maximizing investment fund to the Buddhism

investment fund if rr – tx > rb , and vice versa. With rearrangement, demand for the return -‐ maximizing investment fund and demand for the Buddhism investment fund are

Dr(rb, rr) = x2 = (rr – rb)/t and Db(rb, rr) = 1 – x2 = 1 -‐ (rr – rb)/t

As t rises, demand for the return -‐ maximizing investment fund declines. In other words, with an increase in cost of Buddhist distance perceived by customers, more consumers select Buddhism

investment fund since the opportunity cost goes up. This situation explained is visualized in the exhibit6.

Exhibit6 Buddhist horizontally product differentiation model with two firms selling extremely different fund

Originating from rr at the extreme left of the market, the downward-‐sloping blue line represents the level of utility each consumer obtains from consuming the return -‐ maximizing investment fund. The

farther distance away from the fund a consumer is, the lower utility he acquires. Conversely, the utility consumers gain from purchasing a fund is represented by the horizontal red line. No matter where they are in the market, the acquisition of the Buddhism investment fund yields no utility loss.

Comparing the utility both funds give, each consumer selects the one with higher utility as long as it is above his reservation value. In other words, at each location a consumer prefer a higher line as long as it is above their reservation value. Consequently, consumers within the distance x2 to the left


are in favour of the return -‐ maximizing investment fund while the best choice for those whose stance is to the right of x2 is the Buddhism investment fund.

Then the concept of an outside good is added to the model. Government bond is riskless investment

helping a government and benefiting a country and usually yield relatively low return as a result of government guarantee. It is also perceived as an alternative way to invest and diversify a risk. It is, therefore, reasonable to consider government bond as an outside good for fund industry.

Government bond yields a return of g and incurs no transaction cost to purchase. Hence, utility consumers gain from choosing the government bond is g. Consumers will buy their best satisfied fund in the field rather than government bond if maximum utility they can attain from a fund is

greater than the utility they get from the government bond:

max {rI – t(x-‐a) for x-‐a ≥ 0, rI for x-‐a<0} ≥ g

With the existence of government bond, the condition that consumers will consume one of these two funds rather than the government bond is

max {rr – tx, rb} ≥ g

In conclusion, the first necessary condition for attractive Buddhist investment fund is that its return must be no lower than the return of government bond and its second necessary condition is that its

return must be greater than the return of the return -‐ maximizing investment fund less a consumer’s utility loss from consuming the product with less satisfaction of Buddhist feature. A consumer always selects Buddhist investment fund if its return is larger than the returns of government bond and of

return -‐ maximizing investment fund.


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