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

28 Pages Posted: 7 Nov 2014 Last revised: 25 Feb 2015

See all articles by Thomas P. Lyon

Thomas P. Lyon

University of Michigan, Stephen M. Ross School of Business

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

Date Written: February 20, 2015

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

Suggested Citation

Lyon, Thomas P. and Maxwell, John W., Self-Regulation and Regulatory Discretion: Why Firms May Be Reluctant to Signal Green (February 20, 2015). Ross School of Business Paper No. 1254, Available at SSRN: https://ssrn.com/abstract=2519569 or http://dx.doi.org/10.2139/ssrn.2519569

Thomas P. Lyon

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

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-615-1639 (Phone)

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
Bloomington, IN 47405
United States
812-855 9219 (Phone)
812-855 3354 (Fax)

HOME PAGE: http://johnwmaxwell.com

Indiana University, Department of Economics ( email )

Wiley Hall
Bloomington, IN
United States

Richard Ivey School of Business ( email )

The University of Western Ontario
1151 Richmond Street North
London, Ontario N6A3K7
Canada
5198502439 (Phone)
5198502306 (Fax)

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