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

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. I. INTRODUCTION "While some of the environmental changes now emerging in corporate America are genuine and welcome, a good many are superficial, some are downright diversionary, and a few are being specifically designed to preempt more stringent public policies from emerging." Brent Blackwelder, President Friends of the Earth1 "In an effort to head off legal restrictions on privately traded derivatives, six of Wall Street's biggest securities firms have agreed to voluntarily tighten their controls on the most hotly contested aspects of their derivatives sales and trading." Wall Street Journal March 9, 19952 "In today's society any industry as conspicuous as the major home appliance industry is continually faced with the threat of government regulation. In my opinion, the only way to avoid government regulation is …

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