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Self-Regulation and Regulatory Flexibility: Why Firms May be Reluctant to Signal Green

Thomas Lyon () and John W. Maxwell
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John W. Maxwell: Department of Business Economics and Public Policy, Indiana University Kelley School of Business

No 2014-11, Working Papers from Indiana University, Kelley School of Business, Department of Business Economics and Public Policy

Abstract: Corporate self-regulation is a crucial non-market strategy, and has generally been understood as a response to regulatory threats. However, self-regulation can also influence the nature of regulatory threats, especially when firms have private information about their costs of abatement. We study a setting where regulation can potentially be preempted, providing a public good for the whole industry, but where regulators have flexibility in how they enforce regulatory policies, which can provide benefits to particular firms. Strategic management must balance these concerns. We show that firm self-regulatory actions may alter both the form and likelihood of regulation. As a result, firm decisions shape rather than simply respond to the regulatory threat. We characterize when firms are willing to signal their type through substantial self-regulation, and when they prefer to stay in step with the rest of the industry through modest levels of self-regulation.

Keywords: Self-Regulation; Regulatory Flexibility; Asymmetric Information; Private Governance (search for similar items in EconPapers)
JEL-codes: D83 L31 M14 Q56 (search for similar items in EconPapers)
Date: 2014-09
New Economics Papers: this item is included in nep-bec, nep-env and nep-reg
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