Voluntary Environmental Standards: Furthering Moral Suasion While Preventing Moral HazardEPA Grant Number: R827918
Title: Voluntary Environmental Standards: Furthering Moral Suasion While Preventing Moral Hazard
Investigators: King, Andrew A. , Radner, Roy R. , Shaver, James Myles
Current Investigators: King, Andrew A. , Barnett, Michael , Lenox, Michael , Perkins-Rodriguez, Susan , Radner, Roy R. , Shaver, James Myles , Terlaak, Ann
Institution: Stern School of Business New York University
Current Institution: Dartmouth College , Duke University , New York University , University of Minnesota , University of Wisconsin - Madison
EPA Project Officer: Lee, Sonja
Project Period: September 1, 1999 through October 1, 2001 (Extended to January 27, 2003)
Project Amount: $236,390
RFA: Decision-Making and Valuation for Environmental Policy (1999) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
We will examine several important examples of voluntary or self-organized attempts by industry to regulate their own behavior to determine (1) why firms choose to form or join such initiatives, (2) how voluntary regulations have influenced behavior in their industries, and (3) how these decisions and behavioral changes differ with the composition and structure of the voluntary regulation and the industries in which they operate. We will analyze both the current functioning of some common examples, and develop and test more general models of voluntary regulations. We will use our empirical findings and validated models to propose heuristics for managers and policy makers.
The project has two stages with a major milestone and deliverable at the end of each stage. In both stages, theory development and modeling occur in an iterative process.
Voluntary environmental regulations make for challenging analysis, since the regulation and its impact really represents the outcome of three interdependent theaters of strategic action. In one, firms choose to join or not to join the voluntary agreement. In another, the form of the voluntary agreement itself is negotiated by its members. In the final theater, the participants to the agreement determine how to proceed or behave. Theory development in this project will use economic analysis to model strategic action in these three theaters, but it will also consider the potential for unexpected discoveries and transformations. Decision-making and behavior may be constrained or enlarged by norms within the community of members. Information may flow more easily among participant firms -- thereby changing the nature of strategic interaction.
This analysis will provide information needed by the theory development part of the project, and it will develop methods for use in testing the models. At a minimum this analysis will include investigation of the membership and effect of each voluntary standard. The membership of voluntary regulations can reveal industry expectations for the program, and the relative changes among members and non-members can reveal the effect of the program.
We will use our database of firm and facility characteristics to evaluate differences between member and non-member firms. Minimal target variables include strategic & operational characteristics, competitive environment, regulatory environment, and history. In past work, we have used discrete dependent variable methods, e.g. probit, to estimate the characteristics associated with membership, and thus to infer why firms join voluntary regulations.
Effect on Performance
We plan to estimate the effect of voluntary standards through the use of several regression techniques. The use of several techniques allows us to test alternative theories and to determine the robustness of our findings. In general, we try to explain changes in firm environmental performance with a set of firm and industry attributes. Since these attributes very over time, we can infer causal relations among them. We can then separate these effects from the influence of the voluntary initiative. (for more information, see http://www.stern.nyu.edu/~aking/working/selfreg.pdf)
Environmental policy is entering a new stage that will be characterized by a "public-private system of environmental management that is more flexible, performance-based, and cooperative (USEPA,1999)." This research begins to explore one emerging component of this new system, and helps to uncover how the business and its stakeholders can establish "rules of the game" that lead action in a desired direction. We expect that our work will be of direct interest to a variety of groups. Our work will help develop empirical methods and theoretical models for other researchers. Since voluntary standards may be most useful when direct government is difficult, our work will provide useful guidance to international groups such as the international standards organization and the United Nations. Our work will also help business associations design and communicate the nature and functioning of industry sponsored voluntary initiatives. Already, our research is influencing the Chemical Manufacturers Association's management of the Responsible Care program.
Voluntary regulation, along with contractual regulation and information-based regulation, may allow more effective regulation than traditional command and control or even market-based techniques. At the same time, the flexibility that these new forms provide may allow firms to act strategically and thus may cause the disintegration of voluntary regulations themselves. Thus, the central issue in this study is how to allow firms the flexibility to self-govern their actions without allowing them to act with guile. For the environment, this is of vital importance. Many environmental issues involve complex economic and environmental information. Funneling such problems through government is expensive and time consuming. Our study will begin to reveal when the actors themselves can form a self-governing system to regulate their collective behavior. It will provide guidelines to help industry members to design more effective voluntary programs.
Voluntary regulation can shift the cost of governance from the public to the industries, and in so doing reduce the total cost. Because of their unrivaled knowledge about the industry and their unique access to information, companies may be able to more efficiently allocate improvements and police adherence. This could lead to better and cheaper environmental protection.
Environmental stakeholders will need to monitor and watch over such voluntary initiatives. This study will support this in several ways.
- This research will further develop techniques for auditing the performance of self-regulatory initiatives. It will also further reveal the role that such auditing will play in ensuring successful environmental regulation.
- This research will develop guidelines for how standards organizations and industry associations should design voluntary regulations.
- This research will reveal the degree to which self-regulatory approaches should be supported or compensated. Should for example, government provide flexibility on specific regulations if a firm chooses to join a voluntary program, or should an investor expect that investments in such companies bear a lower risk? Our research will help to reveal when and where such compensation is wise.
Finally, since voluntary regulations are emerging in almost every industry, our study may provide an early warning if voluntary regulations are not likely to provide environmental protection.