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Why Do Firms Comply (…and sometimes“Overcomply”)?

Why Do Firms Comply (…and sometimes“Overcomply”)?. Presentation to OECD Conference on Economic Aspects of Environmental Compliance Assurance Mark A. Cohen Senior Associate Dean Owen Graduate School of Management Vanderbilt University Nashville TN USA. Theoretical Framework.

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Why Do Firms Comply (…and sometimes“Overcomply”)?

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  1. Why Do Firms Comply (…and sometimes“Overcomply”)? Presentation to OECD Conference on Economic Aspects of Environmental Compliance Assurance Mark A. Cohen Senior Associate Dean Owen Graduate School of Management Vanderbilt University Nashville TN USA

  2. Theoretical Framework • No constraints: Profit = F (Revenue – Costs) => Excess emissions (2) “Compliance” Model: Profit = F (Revenue – Costs – Expected Penalty) => Socially optimal emissions IF government “gets it right” (3) “Stakeholder” Model: Profit = F (Revenue – Costs – Expected Penalty – “External Penalty”) Note: “External Penalty” might be + or – i.e. it might be an enhancement to firm reputation… => Government is only one of many Stakeholder Pressures

  3. Implications of model…  Emissions = f (incentive, ability) General Propositions: • Higher penalty => more compliance • More monitoring => more compliance • More firm cares about reputation => more compliance & over-compliance • Financial ability matters

  4. Why Firms Comply/Violate Environmental Laws? • Risk of government monitoring, inspections & penalties (2) Financial ability (3) Agency conflict within organization (e.g. non-compliance is due to manager shirking) (4) Largeversus small? • Large have economies of scale & more to lose

  5. Why Firms Comply/Violate Environmental Laws? (5) Single versus multiple facilities? => Multiple facilities harder to monitor; not “local” => However, multiple facilities have economies of scale (corporate environmental staff, etc.) & firm reputation to consider (6) Localvs. foreign owned? => Difficulty of understanding local laws (only limited evidence) (7) Public vs. Private? • Shareholder/market pressure results in compliance (no evidence) (8) Community Pressure

  6. Newer Question: Why Do Firms Go Beyond Compliance?

  7. Why might firms go beyond compliance? Prop 1: Larger firms (have more reputation capital to lose). (YES) Prop 2: Largest absolute emissions (visible as "bad actors“). (YES) Prop 3: Significant consumer brand name reputations. (???) Prop 4: Negative attention from media & public interest groups.. (???) Prop 5: Largest RELATIVE emissions per unit of production within industry (pressure from shareholder to be less inefficient). (YES) Prop 6: If in interest of shareholders, firms where top management incentives are aligned with shareholders. (???) Prop 7: More punitive enforcement actions by government in prior period. (YES) Prop 8: Firms that can afford are more likely to go beyond compliance. (YES)

  8. Policy Implications & Future research needs • Targeted enforcement can be effective • Value of Information Disclosure • Community & NGO Pressure of growing importance • Unclear what role consumers & “general public” can play • Are largest/publicly traded firms the “best actors”??

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