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Overcompliance and Voluntary Agreements

  • Alberto Cavaliere


Voluntary agreements with industry offer many examplesof overcompliance with respect to environmentalstandards. Such phenomena seem to be irrational butappear less surprising considering firms' strategiesare aimed to internalise environmental quality. Wemodel the choice of the environmental quality ofproducts in a one-shot game between a monopolist andconsumers, to show the existence of inefficientequilibria where quality is low because of moralhazard. The firm can, however, change its' equilibriumstrategy in a repeated but finite game, in order tobuild an environmental reputation if we suppose thatconsumers' information is not only imperfect withregard to quality, but also incomplete with respect toany environmental constraint that may affect thebehaviour of firms (like the threat either of astricter regulation or of potential entry). In atwo-period model, we show the existence of a perfectBayesian equilibrium in mixed strategies where thefirm can revert to the production of green products inorder to influence consumers' beliefs and acquire anenvironmentally friendly reputation. Due to thepeculiarity of environmental information (greenproducts are credence goods), we claim that anexplicit agreement is also necessary in order toestablish monitoring and controlling procedures toverify the performance of firms. These procedures canexplain per se the diffusion of voluntary agreementsthat are nevertheless self-enforcing because of thereputation effect. Copyright Kluwer Academic Publishers 2000

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Article provided by European Association of Environmental and Resource Economists in its journal Environmental and Resource Economics.

Volume (Year): 17 (2000)
Issue (Month): 2 (October)
Pages: 195-202

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Handle: RePEc:kap:enreec:v:17:y:2000:i:2:p:195-202
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  1. Khanna, Madhu & Damon, Lisa A., 1999. "EPA's Voluntary 33/50 Program: Impact on Toxic Releases and Economic Performance of Firms," Journal of Environmental Economics and Management, Elsevier, vol. 37(1), pages 1-25, January.
  2. David Kreps & Robert Wilson, 1999. "Reputation and Imperfect Information," Levine's Working Paper Archive 238, David K. Levine.
  3. Arora Seema & Cason Timothy N., 1995. "An Experiment in Voluntary Environmental Regulation: Participation in EPA's 33/50 Program," Journal of Environmental Economics and Management, Elsevier, vol. 28(3), pages 271-286, May.
  4. Klein, Benjamin & Leffler, Keith B, 1981. "The Role of Market Forces in Assuring Contractual Performance," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 615-41, August.
  5. Darby, Michael R & Karni, Edi, 1973. "Free Competition and the Optimal Amount of Fraud," Journal of Law and Economics, University of Chicago Press, vol. 16(1), pages 67-88, April.
  6. Segerson, Kathleen & Miceli, Thomas J., 1998. "Voluntary Environmental Agreements: Good or Bad News for Environmental Protection?," Journal of Environmental Economics and Management, Elsevier, vol. 36(2), pages 109-130, September.
  7. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-54, May.
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