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Self-Regulation, Negotiated Agreements and Social Welfare


  • Thomas P. Lyon

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)

  • John W. Maxwell

    (Department of Business Economics and Public Policy, Indiana University Kelley School of Business)


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.

Suggested Citation

  • Thomas P. Lyon & John W. Maxwell, 2012. "Self-Regulation, Negotiated Agreements and Social Welfare," Working Papers 2012-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
  • Handle: RePEc:iuk:wpaper:2012-11

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    References listed on IDEAS

    1. Lyon,Thomas P. & Maxwell,John W., 2004. "Corporate Environmentalism and Public Policy," Cambridge Books, Cambridge University Press, number 9780521819473, March.
    2. Allen Blackman, 2010. "Alternative Pollution Control Policies in Developing Countries," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 4(2), pages 234-253, Summer.
    3. Patrick Bolton & Mathias Dewatripont, 2005. "Contract Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262025760, January.
    4. Na Li Dawson & Kathleen Segerson, 2008. "Voluntary Agreements with Industries: Participation Incentives with Industry-Wide Targets," Land Economics, University of Wisconsin Press, vol. 84(1), pages 97-114.
    5. Glachant, Matthieu, 2007. "Non-binding voluntary agreements," Journal of Environmental Economics and Management, Elsevier, vol. 54(1), pages 32-48, July.
    6. Maxwell, John W & Lyon, Thomas P & Hackett, Steven C, 2000. "Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism," Journal of Law and Economics, University of Chicago Press, vol. 43(2), pages 583-617, October.
    7. Thomas P. Lyon, 2004. "Buyer-Option Contracts Restored: Renegotiation, Inefficient Threats, and the Hold-Up Problem," Journal of Law, Economics, and Organization, Oxford University Press, vol. 20(1), pages 148-169, April.
    8. Straub, Paul G., 1995. "Risk dominance and coordination failures in static games," The Quarterly Review of Economics and Finance, Elsevier, vol. 35(4), pages 339-363.
    9. Denicolò, Vincenzo, 2008. "A signaling model of environmental overcompliance," Journal of Economic Behavior & Organization, Elsevier, vol. 68(1), pages 293-303, October.
    10. 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.
    11. Matthew J. Kotchen, 2006. "Green Markets and Private Provision of Public Goods," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 816-845, August.
    12. Anna Alberini & Kathleen Segerson, 2002. "Assessing Voluntary Programs to Improve Environmental Quality," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 22(1), pages 157-184, June.
    13. Hoppe, Eva I. & Schmitz, Patrick W., 2011. "Can contracts solve the hold-up problem? Experimental evidence," Games and Economic Behavior, Elsevier, vol. 73(1), pages 186-199, September.
    14. John Maxwell & Christopher Decker, 2006. "Voluntary Environmental Investment and Responsive Regulation," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 33(4), pages 425-439, April.
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    JEL classification:

    • L0 - Industrial Organization - - General

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