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Greenwash: Corporate Environmental Disclosure under Threat of Audit

  • Thomas P. Lyon
  • John W. Maxwell

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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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 20 (2011)
Issue (Month): 1 (03)
Pages: 3-41

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Handle: RePEc:bla:jemstr:v:20:y:2011:i:1:p:3-41
Contact details of provider: Web page: http://www.kellogg.northwestern.edu/research/journals/JEMS/

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  1. 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.
  2. Thomas P. Lyon & John W. Maxwell, 2004. "Astroturf: Interest Group Lobbying and Corporate Strategy," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 13(4), pages 561-597, December.
  3. Hyun Song Shin, 2003. "Disclosures and Asset Returns," Econometrica, Econometric Society, vol. 71(1), pages 105-133, January.
  4. 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.
  5. 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.
  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. 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.
  8. repec:cup:cbooks:9780521819473 is not listed on IDEAS
  9. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  10. David P. Baron, 2003. "Private Politics," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 12(1), pages 31-66, 03.
  11. repec:cup:cbooks:9780521603768 is not listed on IDEAS
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