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Voluntary Agreements with Industries: Participation Incentives with Industry-wide Targets

  • Na Li Dawson

    (PriceWaterhouseCoopers)

  • Kathleen Segerson

    (University of Connecticut)

There is an increasing interest in the use of voluntary approaches to environmental protection as an alternative to more traditional regulatory approaches. In many cases, entire industries are faced with possible imposition of costly environmental policies if environmental goals are not met voluntarily. If the threat is industry-wide, a potential free-rider problem exists since, if the environmental goal is met by others, individual firms would benefit from avoidance of the costly policy without incurring the associated cost. We develop a multiple-firm model of an industry's voluntary adoption of environmental protection measures to achieve a predetermined industry-wide emissions reduction target under an explicit threat of imposition of an emissions tax. We examine the free-riding incentive of individual firms and its impact on the viability of a voluntary approach to pollution control (VA). We find that despite the free-riding problem, there is an incentive for a sub-group of firms in an industry to participate in a VA. A VA is strictly preferred by the industry as a whole (aggregate industry profits are higher), although it is cost inefficient from society's point of view.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2004-06.

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Length: 35 pages
Date of creation: Nov 2003
Date of revision:
Handle: RePEc:uct:uconnp:2004-06
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Web page: http://www.econ.uconn.edu/

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  1. 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.
  2. 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.
  3. Adam B. Jaffe et al., 1995. "Environmental Regulation and the Competitiveness of U.S. Manufacturing: What Does the Evidence Tell Us?," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 132-163, March.
  4. Carraro, Carlo & Siniscalco, Domenico, 1991. "Strategies for the International Protection of the Environment," CEPR Discussion Papers 568, C.E.P.R. Discussion Papers.
  5. repec:cup:cbooks:9780521311120 is not listed on IDEAS
  6. Stranlund John K., 1995. "Public Mechanisms to Support Compliance to an Environmental Norm," Journal of Environmental Economics and Management, Elsevier, vol. 28(2), pages 205-222, March.
  7. Bagnoli, Mark & Lipman, Barton L, 1989. "Provision of Public Goods: Fully Implementing the Core through Private Contributions," Review of Economic Studies, Wiley Blackwell, vol. 56(4), pages 583-601, October.
  8. Bagnoli, Mark & McKee, Michael, 1991. "Voluntary Contribution Games: Efficient Private Provision of Public Goods," Economic Inquiry, Western Economic Association International, vol. 29(2), pages 351-66, April.
  9. Rondeau, Daniel & Schulze, William D. & Poe, Gregory L., 1997. "Voluntary Revelation Of The Demand For Public Goods Using A Provision Point Mechanism," Working Papers 7265, Cornell University, Department of Applied Economics and Management.
  10. S. Baranzoni & P. Bianchi & L. Lambertini, 2000. "Market Structure," Working Papers 368, Dipartimento Scienze Economiche, Universita' di Bologna.
  11. Barrett, Scott, 1994. "Self-Enforcing International Environmental Agreements," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 878-94, Supplemen.
  12. JunJie Wu & Bruce A. Babcock, 1995. "Optimal Design of a Voluntary Green Payment Program Under Asymmetric Information," Center for Agricultural and Rural Development (CARD) Publications 95-wp131, Center for Agricultural and Rural Development (CARD) at Iowa State University.
  13. Karine Nyborg, 2000. "Voluntary Agreements and Non-Verifiable Emissions," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 17(2), pages 125-144, October.
  14. Wu, JunJie & Babcock, Bruce A., 1996. "Contract Design for the Purchase of Environmental Goods from Agriculture," Staff General Research Papers 1050, Iowa State University, Department of Economics.
  15. Donsimoni, Marie-Paule & Economides, Nicholas S & Polemarchakis, Herakles M, 1986. "Stable Cartels," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 27(2), pages 317-27, June.
  16. repec:cup:cbooks:9780521322249 is not listed on IDEAS
  17. 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.
  18. Marks, Melanie B & Croson, Rachel T A, 1999. " The Effect of Incomplete Information in a Threshold Public Goods Experiment," Public Choice, Springer, vol. 99(1-2), pages 103-18, April.
  19. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  20. Nir Becker & K. William Easter, 1999. "Conflict and Cooperation in Managing International Water Resources Such as the Great Lakes," Land Economics, University of Wisconsin Press, vol. 75(2), pages 233-245.
  21. 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.
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