John W. Maxwell

Greenwash: Corporate Environmental Disclosure Under Threat of Audit

We develop an economic model of “greenwash,” in which a firm strategically discloses environmental information and a non-governmental organization (NGO) may audit and penalize the firm for failing to fully disclose its environmental impacts. We identify conditions under which NGO punishment of greenwash backfires, inducing the firm to become less rather than more forthcoming about its environmental performance. We show that complementarities with NGO auditing may justify public policies encouraging firms to adopt environmental management systems. Mandatory disclosure rules offer the potential for better performance than NGO auditing, but the necessary penalties may be so large as to be politically unpalatable. If so, a mix of mandatory disclosure rules, NGO auditing and environmental management systems may be needed to induce full environmental disclosure.

Corporate Social Responsibility and the Environment: A Theoretical Perspective

We survey the growing theoretical literature on the motives for and welfare effects of corporate greening. We show how both market and political forces are making environmental CSR profitable, and we also discuss morally-motivated or altruistic CSR. Welfare effects of CSR are subtle and situation-contingent, and there is no guarantee that CSR enhances social welfare. We identify numerous areas in which additional theoretical work is needed.

Quality leadership when regulatory standards are forthcoming

In many markets, governments set minimum quality standards while some sellers compete on the basis of quality by exceeding them. Such quality leadership strategies often win public acclaim, especially when they involve environmental attributes. Using a duopoly model of vertical product differentiation, we show that if the high-quality firm can commit to a quality level before regulations are promulgated, it induces the regulator to weaken standards, and welfare falls. Our results raise doubts about the social benefits of corporate self-regulation, and highlight the dangers of lengthy delays between legislative mandates for new regulations and their implementation. Copyright 2000 by Blackwell Publishing Ltd

Label Confusion: The Groucho Effect of Uncertain Standards

Labels certify that a product meets some standard for quality, but often consumers are unsure of the exact standard that the label represents. Focusing on the case of ecolabels for environmental quality, we show how even small amounts of uncertainty can create consumer confusion that reduces or eliminates the value to firms of adopting voluntary labels. First, consumers are most suspicious of a label when a product with a bad reputation has it, so labels are often unpersuasive at showing that a seemingly bad product is actually good. Second, label proliferation aggravates the effect of uncertainty, causing the informativeness of labels to decrease rather than increase. Third, uncertainty makes labeling and nonlabeling equilibria more likely to coexist as the number of labels increases, so consumers face greater strategic uncertainty over how to interpret the presence or absence of a label. Finally, a label can be legitimitized or spoiled for other products when a product with a good or bad reputation displays it, so firms may adopt labels strategically to manipulate such information spillovers, which further exacerbates label confusion. Managers can reduce label confusion by supporting mandatory labeling or by undertaking investments to make certain labels “focal.” This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors. This paper was accepted by Pradeep Chintagunta and Preyas Desai, special issue editors.

Minimum quality standards as a barrier to innovation

Abstract Most models of minimum quality standards do not deal with the dynamic nature of regulation. This note shows that presence of minimum quality standards may reduce firm incentives to innovate, leading to a lower level of social welfare under regulation.

Resource Scarcity and Conflict in Developing Countries

As time passes, renewable resource scarcities are becoming more common. There is increasing evidence that these scarcities are a causal factor in political conflict, especially in developing countries. We present a simple dynamic model of renewable resource and population interaction featuring the possibility of conflict triggered by per capita resource scarcity. In the model, conflict diverts resources away from resource harvesting, increases the death rate, and damages the resource. The two former effects may speed the return to a peaceful steady state. If conflict results in resource destruction, however, it may destabilize the system, leading it towards collapse. Conflict due to renewable resource scarcity could be cyclical, implying recurring phases of conflict. However, such conflict cannot last for ever. We use the model to examine various policy scenarios concerning population control and technical innovations in harvesting and natural resource growth. A key insight of the model is the importance of the bidirectional interplay between conflict and resource scarcity, as opposed to the unidirectional notion that resource scarcity leads to conflict. As such, the model points to the need for the use of simultaneous equation econometric models in empirical investigations of resource scarcity and conflict.

Voluntary Approaches to Environmental Protection

This talk summarizes the results of a series of papers that John Maxwell and I (along with colleagues at other universities) have been working on for some time. Our goals are to understand why companies voluntarily engage in environmental protection, and to understand the implications of these actions for social welfare and for government policy.1

Conflict and Renewable Resources

The economic literature on conflict employs a static, game-theoretic framework developed by Jack Hirshleifer. The authors introduce conflict dynamics into a model with two rival groups, each dependent on a single contested renewable resource. The model is based on two stylized facts: conflict often arises over scarce renewable resources, and those resources often lack well-defined and/or enforceable property rights. In each period, groups allocate their members between resource harvesting and resource appropriation (or conflict) to maximize their income. This leads to a complex nonlinear dynamic interaction between conflict, the two populations, and the resource. As developed, the model relates most closely to conflict over renewable resources in primitive societies. The systems global dynamics are investigated in simulations calibrated for the historical society of Easter Island. The models implications for contemporary lesser developed societies are examined.

Corporate environmental strategies as tools to influence regulation

Corporate environmental initiatives have been attributed to a variety of different motives, including cost-cutting, marketing to ‘green’ consumers willing to pay extra for environmentally friendly products, and shaping future government regulation (including the possible preemption of regulation). Understanding what really motivates corporate environmentalism is important for policymakers, since the effectiveness of government environmental policies depends in large part on how corporations will respond to them. We focus on the welfare implications of two alternative strategies firms may use to shape government regulations: (i) attempting to preempt future legislation altogether or (ii) failing this, to soften the impact of new laws by inducing regulators to set relatively weak standards. We show that while the first sounds threatening to social welfare, it produces political cost savings that outweigh any weakening of environmental performance. The second motivation, however, raises corporate profits, but not by enough to outweigh the resulting loss of environmental quality. Copyright

The Impact of Industry Structure and Penalty Policies on Incentives for Compliance and Regulatory Enforcement

This paper examines the optimal fine for violations of environmental regulations, taking into account financial constraints facing regulated firms and the hierarchical structure of regulatory enforcement. Contrary to the existing literature, which suggests that maximal fines are sub-optimal, we find that the optimal fine is either the maximum amount the firm can afford to pay or zero (i.e., no regulation). The impact of a change in industry structure on the optimal fine, firm compliance and regulatory resource strategies is considered. We identify conditions under which the equilibrium level of regulatory resources decreases with an increase in the number of firms in the industry.