We present an economic model of greenwash, in which a firm strategically discloses environmental information and a non-governmental organization (NGO) may audit and penalize the firm for failing to fully disclose its environmental impacts. We show that disclosures increase when the likelihood of good environmental performance is lower. Firms with intermediate levels of environmental performance are more likely to engage in greenwash. Under certain conditions, NGO punishment of greenwash induces the firm to become less rather than more forthcoming about its environmental performance. We also show that complementarities with NGO auditing may justify public policies encouraging firms to adopt environmental management systems.

We extend the economic theory of regulation to allow for strategic self-regulation that preempts political action. When political "entry" is costly for consumers, firms can deter it through voluntary restraints. Unlike standard entry models, deterrence is achieved by overinvesting to raise the rival's welfare in the event of entry. Empirical evidence on releases of toxic chemicals shows that an increased threat of regulation (as proxied by increased membership in conservation groups) indeed induces firms to reduce toxic releases. We establish conditions under which self-regulation, if it occurs, is a Pareto improvement once costs of influencing policy are included.

We present an economic model of greenwash, in which a firm strategically discloses environmental information and a non-governmental organization (NGO) may audit and penalize the firm for failing to fully disclose its environmental impacts. We show that disclosures increase when the likelihood of good environmental performance is lower. Firms with intermediate levels of environmental performance are more likely to engage in greenwash. Under certain conditions, NGO punishment of greenwash induces the firm to become less rather than more forthcoming about its environmental performance. We also show that complementarities with NGO auditing may justify public policies encouraging firms to adopt environmental management systems.

We extend the economic theory of regulation to allow for strategic self-regulation that preempts political action. When political "entry" is costly for consumers, firms can deter it through voluntary restraints. Unlike standard entry models, deterrence is achieved by overinvesting to raise the rival's welfare in the event of entry. Empirical evidence on releases of toxic chemicals shows that an increased threat of regulation (as proxied by increased membership in conservation groups) indeed induces firms to reduce toxic releases. We establish conditions under which self-regulation, if it occurs, is a Pareto improvement once costs of influencing policy are included.

We survey the growing theoretical literature on the motives for and welfare effects of corporate greening. We show how both market and political forces are making environmental CSR profitable, and we also discuss morally-motivated or altruistic CSR. Welfare effects of CSR are subtle and situation-contingent, and there is no guarantee that CSR enhances social welfare. We identify numerous areas in which additional theoretical work is needed.

This is the first book to provide a hard-headed economic view of the voluntary approaches to environmental issues, especially toxic chemicals, waste disposal, and global warming, that have become prominent since the mid-1990s. Corporate environmental initiatives are seen as a tool for influencing the behavior of environmental activists, legislators, and regulators, though they may have ancillary benefits such as attracting "green" consumers or reducing costs. Equally, government voluntary programs are seen as a way to achieve modest environmental results when political resistance to mandatory policies is high. Rigorous analysis is illustrated with numerous case studies drawn from the USA, Europe, and Japan, while technical details are relegated to appendices, and each chapter highlights implications for corporate strategy and public policy. Although rooted in economic theory, this book will appeal to business strategists and policy practitioners, as well as scholars and researchers. t h o m a s p. l y o n holds the Chair of Sustainable Science, Technology and Commerce of the University of Michigan Business School, Ann Arbor. He is the editor of the forthcoming volume Regulation (2004). His primary research interest is the interplay between corporate strategy and public policy and he has served as a consultant to business and to government in these areas. j o h n w. m a x w e l l is Associate Professor at the Kelley School of Business, Indiana University. His primary research focus is the political economy of environmental regulation and the impact of corporate behavior on the development and enforcement of environmental regulations.

In many markets, governments set minimum quality standards while some sellers compete on the basis of quality by exceeding them. Such quality leadership strategies often win public acclaim, especially when they involve environmental attributes. Using a duopoly model of vertical product di¡erentiation, we show that if the high-quality ¢rm can commit to a quality level before regulations are promulgated, it induces the regulator to weaken standards, and welfare falls. Our results raise doubts about the social bene¢ts of corporate self-regulation, and highlight the dangers of lengthy delays between legislative mandates for new regulations and their implementation.

Environmental “public voluntary programs” (PVPs) involve government offers of positive publicity and technical assistance to firms that reach certain environmental goals. A growing body of empirical work suggests these programs generally have little impact on the behavior of their participants. A natural policy conclusion would be to eliminate PVPs, but we argue that such a conclusion is premature. Many PVPs are best viewed as information diffusion programs, so identifying their effects econometrically is difficult because information is likely to diffuse to nonparticipants. Thus, after the early phases of even a successful PVP, it may well be impossible to detect a difference in the performance between participants and nonparticipants. We argue that new estimation approaches are needed to identify the effects of PVPs. We also explore the design of PVPs in detail, showing how PVPs can potentially enhance the diffusion of cost‐effective techniques for pollution abatement.