The Impact of REACH on Eco-Innovation: How Perception Misfits on Policy Stringency Matter

This article provides new insights into the impact of various policy designs on firms' innovative activities of substituting dangerous chemicals with less damaging ones. Such a principle of substitution is at the heart of the REACH regulation enacted in 2007 to control potentially dangerous chemicals in the European Union (EU). In recent years, research scientists, government panels, and the popular press have denounced bisphenol-A (BPA) used in food packaging for its developmental effect as an endocrine disruptor. In this article, we develop an agent-based model (ABM) as an explorative tool to investigate how the policy design of REACH can help bring safer substitutes of bisphenols to market. We mimic the main mechanisms underlying REACH, suggest the importance of perceived stringency on eco-innovative activities, and address the issue of possible interaction among the various policy design aspects. The modeling exercise enables an analysis of misfits likely to emerge between objective and perceived stringency of regulation as well as misfits related to divergent perceptions between suppliers and clients. The model outcomes stress that the efficiency of severe regulation depends little on how agents perceive it; objective stringency is self-sufficient to stimulate technology transition. A severe regulation results in a stable oligopoly after experiencing an early but short turbulent phase because of the ban of the dangerous substance. This action calls for an assessment by policy makers of the necessary trade-offs between fast environmental and health benefits, temporary demand mismatches and higher market concentration. By contrast, the impact of a lenient regulation depends sorely on how agents perceive it. In particular, possible misfits in the perception of policy stringency between suppliers and clients may strengthen the efficiency of the regulation or, on the contrary, make it irrelevant. These findings highlight that the way stakeholders perceive the regulatory threat may be a key aspect to consider when fostering technological transition.