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

Posted: 27 Jun 2000

See all articles by John W. Maxwell

John W. Maxwell

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy; Indiana University, Department of Economics; Richard Ivey School of Business

Thomas P. Lyon

University of Michigan, Stephen M. Ross School of Business

Steven C. Hackett

Humboldt State University - School of Business and Economics

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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.

JEL Classification: D72, K32, L51, Q28

Suggested Citation

Maxwell, John W. and Lyon, Thomas P. and Hackett, Steven C., Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism. Available at SSRN: https://ssrn.com/abstract=234608

John W. Maxwell (Contact Author)

Indiana University - Kelley School of Business - Department of Business Economics & Public Policy ( email )

Department of Business Economics and Public Policy
Kelley School of Business, Indiana University
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United States
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HOME PAGE: http://johnwmaxwell.com

Indiana University, Department of Economics ( email )

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Richard Ivey School of Business ( email )

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Thomas P. Lyon

University of Michigan, Stephen M. Ross School of Business ( email )

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Steven C. Hackett

Humboldt State University - School of Business and Economics ( email )

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United States
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707-826-6666 (Fax)

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