Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism
Date
01.01.1998
01.01.1998
Authors
John W. Maxwell, Thomas P. Lyon, Steven C. Hackett
JEL Code
D72,K32,L51,Q28
D72,K32,L51,Q28
Keywords:
Regulation,Environment,Self-regulation,Political Economy
Regulation,Environment,Self-regulation,Political Economy
Publisher
Climate Change and Sustainable Development
Climate Change and Sustainable Development
Editor
Carlo Carraro
Carlo Carraro
We extend the economic theory of regulation to allow for strategic self-regulation that preempts political action. When political “entry” is costly for consumer, firms can deter it through voluntary restraints. Unlike standard entry models, deterrence is achieved by over-investing 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.