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Self-Regulation and Regulatory Flexibility: Why Firms May be Reluctant to Signal Green

Author

Listed:
  • Thomas P. Lyon

    (Ross School of Business, University of Michigan)

  • John W. Maxwell

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

Abstract

Corporate self-regulation is a crucial non-market strategy, and has generally been understood as a response to regulatory threats. However, self-regulation can also influence the nature of regulatory threats, especially when firms have private information about their costs of abatement. We study a setting where regulation can potentially be preempted, providing a public good for the whole industry, but where regulators have flexibility in how they enforce regulatory policies, which can provide benefits to particular firms. Strategic management must balance these concerns. We show that firm self-regulatory actions may alter both the form and likelihood of regulation. As a result, firm decisions shape rather than simply respond to the regulatory threat. We characterize when firms are willing to signal their type through substantial self-regulation, and when they prefer to stay in step with the rest of the industry through modest levels of self-regulation.

Suggested Citation

  • Thomas P. Lyon & John W. Maxwell, 2014. "Self-Regulation and Regulatory Flexibility: Why Firms May be Reluctant to Signal Green," Working Papers 2014-11, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy.
    • Handle: RePEc:iuk:wpaper:2014-11
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    File URL: http://kelley.iu.edu/riharbau/RePEc/iuk/wpaper/bepp2014-11-lyon-maxwell.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    Self-Regulation; Regulatory Flexibility; Asymmetric Information; Private Governance;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • L31 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Nonprofit Institutions; NGOs; Social Entrepreneurship
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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