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Regulation and opportunism: How much activism do we need?

This paper analyzes the current trend towards firms’ self-regulation as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market(conscious consumers that take into account the external effects of their purchase) by providing more socially responsible goods. However, because regulation is the outcome of a political process, an increase in activism might imply an inefficiently higher externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less efficient) goods.

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File URL: http://www.econ.upf.edu/docs/papers/downloads/935.pdf
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Paper provided by Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 935.

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Date of creation: Sep 2005
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Handle: RePEc:upf:upfgen:935
Contact details of provider: Web page: http://www.econ.upf.edu/

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