Environmental standards: Examining a regulator’s strategy for setting a deadline

One of the most common approaches that regulators use to improve the environmental performance of firms is to enact a standard that firms must comply with before a set deadline or face a penalty. In this study, we examine how a regulator should set the deadline for a new standard in a market with two competing firms that make technology development and production decisions. We show that when the firms are differentiated by development capability, as the difference between firms’ development capabilities increases, the regulator must be careful as her effort to reduce the lower capability firm’s cost may inadvertently lead to the higher capability firm decreasing his development investment. When the firms are instead differentiated by production capability, as the difference between firms’ capabilities increases, this can create an opportunity for the regulator to take advantage of the higher capability firm’s motivation to gain market share and set an earlier deadline. Extending our model, we find that (i) the regulator should use a development assistance program as a complimentary lever to a deadline for decreasing firms’ compliance times and costs, (ii) when firms can collaborate, the regulator should almost always set a more aggressive deadline, and (iii) the lower capability firm’s attempt to gain a first mover advantage can increase the regulator’s total cost for the standard.