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Greenwash: Corporate Environmental Disclosure under Threat of Audit

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  • Thomas P. Lyon

    (Stephen M. Ross School of Business at the University of Michigan)

  • John W. Maxwell

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

Abstract

We develop an economic model of “greenwash,” in which a firm strategically discloses environmental information and a non-governmental organization (NGO) may audit and penalize the firm for failing to fully disclose its environmental impacts. We identify conditions under which NGO punishment of greenwash backfires, inducing the firm to become less rather than more forthcoming about its environmental performance. We show that complementarities with NGO auditing may justify public policies encouraging firms to adopt environmental management systems. Mandatory disclosure rules offer the potential for better performance than NGO auditing, but the necessary penalties may be so large as to be politically unpalatable. If so, a mix of mandatory disclosure rules, NGO auditing and environmental management systems may be needed to induce full environmental disclosure.

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Bibliographic Info

Paper provided by Indiana University, Kelley School of Business, Department of Business Economics and Public Policy in its series Working Papers with number 2006-07.

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Date of creation: Mar 2006
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Handle: RePEc:iuk:wpaper:2006-07

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  1. Thomas P. Lyon & John W. Maxwell, 2004. "Astroturf: Interest Group Lobbying and Corporate Strategy," Working Papers 2004-18, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  2. Hyun Song Shin, 2001. "Disclosures and asset returns," LSE Research Online Documents on Economics 25044, London School of Economics and Political Science, LSE Library.
  3. Timothy J. Feddersen & Thomas W. Gilligan, 2001. "Saints and Markets: Activists and the Supply of Credence Goods," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 10(1), pages 149-171, 03.
  4. Patten, Dennis M., 1992. "Intra-industry environmental disclosures in response to the Alaskan oil spill: A note on legitimacy theory," Accounting, Organizations and Society, Elsevier, vol. 17(5), pages 471-475, July.
  5. David P. Baron, 2003. "Private Politics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 31-66, 03.
  6. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  7. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  8. Robert Innes, 2006. "A Theory of Consumer Boycotts under Symmetric Information and Imperfect Competition," Economic Journal, Royal Economic Society, vol. 116(511), pages 355-381, 04.
  9. Lyon,Thomas P. & Maxwell,John W., 2004. "Corporate Environmentalism and Public Policy," Cambridge Books, Cambridge University Press, number 9780521819473.
  10. Tom Tietenberg, 1998. "Disclosure Strategies for Pollution Control," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(3), pages 587-602, April.
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