Self-Regulation and Regulatory Discretion: Why Firms May Be Reluctant to Signal Green

Abstract

A large literature in strategy and management has focused on why firms self-regulate and "signal green." We show this decision becomes more complex when regulators have enforcement discretion, and both firms and regulators act strategically. We model the managerial decision whether to signal the firm's type through substantial self-regulation, or whether to stay in step with the rest of the industry through modest levels of self-regulation. Self-regulation is a double-edged sword: it can potentially preempt legislation, but it can also lead regulators to demand higher levels of compliance from greener firms if preemption fails. We show how self-regulatory decisions depend upon industry characteristics and political responsiveness to corporate environmental leadership.

Keywords: self-regulation, signaling, regulatory discretion, regulatory flexibility

JEL Classification: C72, D62, D78, D82, K2, L51