Why Do Firms Comply (

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Why Do Firms Comply (and sometimesOvercomply)?

• 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

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Theoretical Framework

• No constraints
• Profit F (Revenue Costs)
• gt Excess emissions
• (2) Compliance Model
• Profit F (Revenue Costs Expected Penalty)
• gt 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
• gt Government is only one of many Stakeholder
  Pressures

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Implications of model

• ? Emissions f (incentive, ability)
• General Propositions
• Higher penalty gt more compliance
• More monitoring gt more compliance
• More firm cares about reputation gt more
  compliance over-compliance
• Financial ability matters

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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) Large versus small?
• Large have economies of scale more to lose

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Why Firms Comply/Violate Environmental Laws?

• (5) Single versus multiple facilities?
• gt Multiple facilities harder to monitor not
  local
• gt However, multiple facilities have economies
  of scale (corporate environmental staff, etc.)
  firm reputation to consider
• (6) Local vs. foreign owned?
• gt Difficulty of understanding local laws (only
  limited evidence)
• (7) Public vs. Private?
• Shareholder/market pressure results in compliance
  (no evidence)
• (8) Community Pressure

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Newer Question Why Do Firms Go Beyond Compliance?
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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)

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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??