Self‐Regulation and Social Welfare: The Political Economy of Corporate Environmentalism

Abstract

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.

Follow the Money: Online Piracy and Self-Regulation in the Advertising Industry

“…3 This seems to be in line with a literature that has argued that firms can have incentives to strategically internalize ("self-regulate") to preempt political action (e.g. Maxwell et al, 2000), or sacrifice profits as a response to consumer activism (e.g. Hendel et al, 2017).…”

“…First, we provide evidence that different types of firms face different types of trade-offs in the strategic decision to selfregulate, adding to a large literature on corporate self-regulation (see e.g. Maxwell et al, 2000;Egorov and Harstad, 2017). Second, we contribute to the literature on the economics of online advertising, tracking and privacy (see Tucker, 2012;Goldfarb, 2014;Peitz and Reisinger, 2015 for summaries).…”

Marking Their Own Homework: The Pragmatic and Moral Legitimacy of Industry Self-Regulation

“…Indeed, one of the problems in evaluating ISR effectiveness is the different ideologically driven perspectives on ISR effectiveness from whose perspective, over what time period and as compared to what (Gupta and Lad 1983). Past studies have assessed the consequences of ISR schemes by examining the extent to which schemes fulfil the functional or governance functions they were designed to serve (Hahn and Pinkse 2014;Wijen 2014), whether they encourage participation (Prado and Woodside 2015;Schuler and Christmann 2011), whether they trigger pro-social behaviour change in participating firms (Terlaak 2007;Schuler and Christmann 2011), whether they improve allocative efficiency (Maxwell et al 2000;Fleckinger and Glachant 2011) and ultimately whether they deliver material improvements in the social domains they are designed to address (Blackman and Rivera 2011;Darnall and Sides 2008;Aravind and Christmann 2011).…”

“…Proponents have argued that ISR can achieve public policy objectives at lower cost than government regulation because regulatory decisions are made by those with the best information and expertise to make them (Coglianese and Mendelson 2010;Gunningham and Rees 1997). ISR can help improve social efficiency, that is, allocate resources to their best available uses across society (Maxwell et al 2000). ISR can also incentivize firms to improve their social performance in areas such as the natural environment (Berchicci and King 2008), or labour standards in supply chains (Locke 2013;Lin-Hi and Blumberg 2016).…”

The design of voluntary agreements in oligopolistic markets

“…An example of framework compatible with these hypotheses is the case studied by Aggeri and Hatchuel (1999), where firms adopting a VA agree to common technological innovation efforts in order to attain a cleaner production goal. Another example is provided by Maxwell, Lyon and Hackett (2000), who analyse how firms can jointly undertake self-regulatory initiatives so as to influence citizens' demand for mandatory regulation, and consequently modify the regulator's decisions. To account for the above features of observed VAs, we assume that firms that sign a VA have expected costs lower than those they would face were mandatory policy measures applied.…”