Self-Regulation, Negotiated Agreements and Social Welfare

The literature on voluntary agreements studies self-regulation, negotiated agreements and public voluntary programs, typically in the shadow of a legislative threat. Prior studies have examined each of these instruments in isolation, but interactions between them have received less attention. We show that in the presence of multiple voluntary instruments, equilibrium outcomes and welfare results depend critically on the timing of moves and the bargaining power of each player. In contrast to prior work, we find conditions under which a full-information equilibrium involves self-regulation and no negotiated agreement. We also show that the opportunity to sign a negotiated agreement only reduces welfare when the regulator has little bargaining power and the firm can commit to an inefficient threat to eschew self-regulation should negotiations fail. More generally, we stress the need for the literature to take account of the "technological detail" of particular contexts when studying voluntary agreements.