An institutional analysis of environmental self-regulation

Economic research on environmental self-regulation (ESR) neglects institutional issues. To address this omission, this dissertation studies the influence of free riding on the effectiveness of ESR and the influence of transaction costs and missing markets on the form of ESR.; As noted in chapter one, there are three motivations for ESR: (1) ESR may yield net cost savings to firms; (2) government may change the regulatory burdens for firms that engage in ESR; and (3) ESR can create marketing advantages for firms as occurs when consumers pay more for “green” products. Chapter two offers examples of environmental self-regulation in order to illustrate these three motivations.; Chapter three applies Olson's theory of collective action and the theory of evolutionary games to the problem of free riding in consumer-driven ESR. Free riding may be a problem for environmental self-regulation when consumers, who would otherwise support a firm's environmental efforts through their purchases, choose to free ride on the actions of other consumers. As Olson notes, in large group situations, free riding is primarily overcome through the use of selective incentives. Chapter three explores the use of selective incentives in ESR in greater detail. While chapter three formalizes the concepts through evolutionary game theory, such a formal apparatus yields little in the way of conceptual understanding. This leads to the conclusion that richer formal modeling will require the use of complex simulation models.; Chapter four studies the influence of transaction costs and missing markets on the organizational form that environmental self-regulation adopts. Firms self-regulate in order to reap benefits from cost savings, government, or markets. These benefits involve transactions with varying attributes, particularly asset specificity and uncertainty. In addition, the markets through which firms attempt to reap benefits operate with poor information and are therefore incomplete or missing. Hence, before environmental self-regulation can consistently occur, firms, consumers, and government need to develop organizational forms that can protect necessary specific investments and can increase the availability and reliability of information. In particular, ESR must adopt contracts with government, uniform standards, or vertical organization, depending on the particulars of the transaction.; The conclusion draws on the concepts of (a) free riding and missing markets and (b) transaction cost to propose circumstances in which ESR is likely to appear and succeed. Both government-motivated and consumer-motivated ESR will appear where the incentives facing the firm are strong, that is, where consumer demand is high or government pressure is strong. In addition, since both government-motivated and consumer-motivated ESR may be subject to free riding, successful ESR will occur either in small groups (such as an industry with only a few firms) or where selective incentives are present. Furthermore, where firms must make specific investments, successful ESR will protect those investments through standardization or contracts with government.; ESR is not a pure alternative to government regulation. The incentives and structures that support ESR can be adopted by government as when the government gives public recognition to firms. Finally, government action may be necessary to create selective incentives, protect assets, and improve missing markets. Only with these institutional supports can ESR function.