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Overcompliance and Voluntary Agreements

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  • Alberto Cavaliere

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Abstract

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

Suggested Citation

  • Alberto Cavaliere, 2000. "Overcompliance and Voluntary Agreements," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 17(2), pages 195-202, October.
  • Handle: RePEc:kap:enreec:v:17:y:2000:i:2:p:195-202
    DOI: 10.1023/A:1008322406871
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    References listed on IDEAS

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    1. 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.
    2. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-554, May.
    3. 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.
    4. Kreps, David M. & Wilson, Robert, 1982. "Reputation and imperfect information," Journal of Economic Theory, Elsevier, vol. 27(2), pages 253-279, August.
    5. 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 615-641, August.
    6. 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.
    7. 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.
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    Cited by:

    1. Anne-Sarah Chiambretto & Hubert Stahn, 2017. "Voluntary Management of Fisheries under an Uncertain Background Legislative Threat," AMSE Working Papers 1712, Aix-Marseille School of Economics, Marseille, France.
    2. Prieger, James E. & Sanders, Nicholas J., 2012. "Verifiable and non-verifiable anonymous mechanisms for regulating a polluting monopolist," Journal of Environmental Economics and Management, Elsevier, vol. 64(3), pages 410-426.
    3. Chengyan Yue & Terrance M. Hurley & Neil Anderson, 2011. "Do native and invasive labels affect consumer willingness to pay for plants? Evidence from experimental auctions," Agricultural Economics, International Association of Agricultural Economists, vol. 42(2), pages 195-205, March.
    4. Rosetta Lombardo, 2009. "Beyond Compliance: Firms’ Environmental Behaviour. A Survey," Working Papers 200918, Università della Calabria, Dipartimento di Economia, Statistica e Finanza "Giovanni Anania" - DESF.
    5. Sengupta, Aditi, 2015. "Competitive investment in clean technology and uninformed green consumers," Journal of Environmental Economics and Management, Elsevier, vol. 71(C), pages 125-141.
    6. Qizhong YANG & Tsunehiro OTSUKI, 2017. "The Product-Related Environmental Regulation, Innovation, and Competitiveness: Empirical Evidence from Malaysian and Vietnamese Firms," OSIPP Discussion Paper 17E007, Osaka School of International Public Policy, Osaka University.
    7. Wu JunJie & Wirkkala Teresa M., 2009. "Firms' Motivations for Environmental Overcompliance," Review of Law & Economics, De Gruyter, vol. 5(1), pages 399-433, June.
    8. Shimshack, Jay P. & Ward, Michael B., 2008. "Enforcement and over-compliance," Journal of Environmental Economics and Management, Elsevier, vol. 55(1), pages 90-105, January.
    9. Böhringer, Christoph & Frondel, Manuel, 2002. "Assessing Voluntary Commitments: Monitoring is Not Enough!," ZEW Discussion Papers 02-62, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    10. Caplan, Arthur J., 2003. "Reputation and the control of pollution," Ecological Economics, Elsevier, vol. 47(2-3), pages 197-212, December.
    11. R. Brau & C. Carraro, 2004. "The economic analysis of voluntary approaches to environmental protection. A survey," Working Paper CRENoS 200420, Centre for North South Economic Research, University of Cagliari and Sassari, Sardinia.
    12. Noll, Juergen, 2004. "Comparing quality signals as tools of consumer protection: are warranties always better than advertisements to promote higher product quality?," International Review of Law and Economics, Elsevier, vol. 24(2), pages 227-239, June.
    13. Ujjayant Chakravorty & Céline Nauges & Henry Thille, 2012. "Gasoline Content Regulation and Compliance among US Refineries," CESifo Working Paper Series 3978, CESifo Group Munich.
    14. Lander Beloqui & Jose M. Usategui, 2004. "Overcompliance with minimum quality standards," Investigaciones Economicas, Fundación SEPI, vol. 28(2), pages 233-255, May.

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