SelfRegulatory Institutions for Solving Environmental Problems

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Self-Regulatory Institutions for Solving
Environmental Problems

• Andrew King
• Tuck School of Business at Dartmouth

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The Management Literature on BE Emphasizes Two
Issues

• Playing the contest better
• Pays to be green
• Making a better contest
• Better institutions and rules

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Institutions are the humanly devised constraints
that structure political, economic, and social
interaction.Douglas North
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A Typology of Institutions
Hierarchies fix transaction costs
?
Standards Cartels Clubs
Firms
Private
Pre and post conscious constraints prevent strate
gic choice
Not Us
Public
Culture
Government
Decentralized
Centralized
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Dominant Perspectives in Management on
Self-Regulation

• Garrett Hardin Tragedy of the Commons
• Common resources always cause tragedy
• Collective self-regulation is impossible
• Mancur Olson
• People to contribute to public goods only when
  they get a direct private benefit

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An Understudied Area in Management
Least Explored
Standards Cartels Clubs
Prob(study) prob( interest in collective
issues) prob(interest in decentralized
solutions)
Firms
Private
Public
Culture
Government
0
Decentralized
Centralized
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Mostly the Management Literature Doesnt Consider
Issues Related to Governance of Environmental
Problems
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Keyword Use Comparison
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Self-Regulation Rarely Considered
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Scholars of BE are Contributing to Improved
Understanding of Self-Regulatory Institutions

• What drives the formation of SRIs?
• Who sponsors them and how do they arise?
• How do they obtain the power to control behavior?

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A Issue Two Rival Models

• 1) Institutions are the manifestation of rational
  actors making strategic choices.
• 2) The taken for granted nature of institutions
  enable them to exert pre (and post) conscious
  constraints on strategic behavior.

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Drivers

• Response to Exchange Problems
• Commons Problems
• Collective sanctioning
• Collective reputation
• Asymmetric information
• Asymmetric information
• History
• Events
• Metaphors
• Field level changes in perception of legitimate
  actions

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Institutional Entrepreneurs

• Numerous Sponsors
• corporations,
• trade associations,
• NGOs and NGO partnerships,
• international organizations

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Econometric Analysis

• Participation
• RC, ISO 14000 and 9000, Sustainable Slopes,
  Ecotourism, etc.
• Performance
• RC, ISO, Slopes,
• Incentive compatible equilibrium
• Initial work on
• RC, ISO

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Results

• Firms act strategically with respect to SRIs
• In institutions with weak enforcement
• Adverse selection and moral hazard.
• In institutions with better enforcement
• Meaningful differentiation
• But
• History matters,
• As do the three pillars,
• Entrepreneurs intentions and often confused and
  not always realized, and
• SRIs seem to take on meaning and power they dont
  deserve.

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Future Directions

• Interaction with other institutions
• More histories of institutional formation and
  evolution
• More analysis of institutional entrepreneurs
• Experimental analysis
• Merge self-regulation into management models of
  institutional choice (markets versus hierarchies).

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We are not alone!

• Provision of public goods
• Stern and Furman
• Open source software
• Lerner Tirole and von Hippel
• Standards formation
• Simcoe
• Garud
• Agglomeration
• Shaver etc.

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Company Behavior
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sometimes cause industry wide problems
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Sins of Our Brothers

• We are still an oil company, and we still have
  to live with the sins of our brothers. We were
  doing fine until Exxon spilled all that oil. Then
  we were painted with the same brush. (Amoco
  executive from Hoffman, 1997)
• Andersen . . . has weakened the foundation of
  trust and credibility that the accounting
  profession has had.(editor, Bowmans Accounting
  Report)

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The Bhopal Accident and the Chemical Industry
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Responsible Care

• Program sets environmental, health, and safety
  standards
• Initiated in 1990
• Self-reported compliance
• International
• Extremely influential

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Responsible Care

• Participants are in dirtier sectors,
• have better known brand names,
• are more focused in chemicals
• have dirtier facilities
• Yes, even controlling for output,
• and improve more slowly.
• but the program adds value to stock price, and
  reduces spillover effect from accidents.

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but even academics can have an effect

• An internal government report stated that my
  paper with Mike Lenox
• influenced Christie Todd Whitmans policy on
  industry self-regulation as a substitute for
  govt. regulation,
• caused the American Chemical Council (formerly
  the CMA) to change its leadership and its name,
• and caused RC to implement much tougher controls
  including management system verification and
  third party certification.
• New evidence suggests RC facilities more likely
  to have well-functioning Environmental Management
  Systems.

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Other Examples of Self-Regulation

• ISO 14000
• Evidence that firms use it to signal their
  efforts to improve their environmental
  performance to distant exchange partners
• Sustainable Slopes
• Like RC, initially falls victim to adverse
  selection. Jorge Riveras research causes group
  to tighten standards.

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A New Self-Regulation

• A financial industry benchmark for determining,
  assessing and managing social environmental
  risk in project .