FEEM working papers "Note di lavoro" series
1999 .074

Self-Enforcing Voluntary Agreements and Environmental Reputation


Authors: Alberto Cavaliere
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
JEL n.: Q28,L14,D82,C72
JEL: Environmental and Resource Economics
Pages: Vol. 17, N. 2
Date: 2000

Abstract

Voluntary agreements with industry offer many examples of overcompliance with respect to environmental standards. Such phenomena seem to be irrational but appear less surprising considering firms' strategies are aimed to internalise environmental quality. We model the choice of the environmental quality of products in a one-shot game between a monopolist and consumers, to show the existence of inefficient equilibria where quality is low because of moral hazard. The firm can however change its equilibrium strategy in a repeated but finite game, in order to build an environmental reputation if we suppose that consumers' information is not only imperfect with regard to quality, but also incomplete with respect to any environmental constraint that may affect the behaviour of firms (like the threat either of a stricter regulation or of potential entry). In a two-periods model we show the existence of a perfect Bayesian equilibrium in mixed strategies where the firm can revert to the production of green products in order to influence consumers' beliefs and acquire an environmentally friendly reputation. Due to the peculiarity of environmental information (green products are credence goods), we claim that an explicit agreement is also necessary in order to establish monitoring and controlling procedures to verify the performance of firms. These procedures can explain per se the diffusion of voluntary agreements that are nevertheless self-enforcing because of the reputation effect.

Download file
Download PDF file

FEEM Newsletter

Subscribe to stay connected.

Your personal data will be processed by Fondazione Eni Enrico Mattei. – data Controller – with the aim of emailing the FEEM newsletter. The use of Your email address is necessary for the implementation of the newsletter service. You are invited to read the Privacy Policy in order to obtain additional information about the protection of Your rights.

This Website uses technical cookies and cookie analytics, as well as “third party” profiling cookies.
If you close this banner or you decide to continue navigating on this Website, you express consent to the use of cookies. If you need additional information or you wish to express selective choices on the use of cookies, please refer to the   Cookie PolicyI agree