Thursday, August 11, 2005

Can companies be shamed into environmental compliance?

I sometimes take a look at www.env-econ.net --- there seem to be a lot of different voices speaking there but it has been endorsed by AERE! The short note on the power of shame interests me. Dora Costa and I have a NBER Working Paper called "Shame and Ostracism" in a completely different setting (The U.S Civil War).

When can "shame" be an effective regulatory tool? The Media certainly cover
stories when the Toxic Release Inventory announces the leading polluters for the last year. Since TRI emissions are self-reported by firms, I've always been confused whether the anticipation of shame leads polluting companies to take "real" actions that reduce emissions or to engage in "accounting" tricks to simply look green.

How could shame green?

Case A: The CEO is a green "wannabe" (think of Bill Ford at Ford) and bad press leads him to sacrifice some firm's profits in pursuit of social goals. Clearly for this to be an equilibrium, this boss must not fear being fired by shareholders --- so either the company is a family owned firm or there is not full competition to become
boss of the firm.

Case B: Consumers of the product can credibly commit to substitute to a "greener" alternative product if the company stays brown. Shame can only work if consumers do not free ride. Each consumer has an incentive to continue to buy the product at its cheap price and let everyone else boycott. The existence of close substitutes for any given differentiated product would need to be investigated industry by industry
using the Berry, Levinsohn, Pakes discrete choice models of product demand.

Case C: Workers and compensating differentials. Suppose that a firm has
a reputation for being satanic. In an extreme case workers may be embarrassed to
tell their friends that they work there (the opposite of working for Amazon). To recruit good workers, this firm would need to pay a wage premium. If human
capital is the key input for such a firm, the shame premium could raise their
cost structure enough that it would be profitable to become a greener firm.

Is there a Case "D"? I need to think about this. It would interest me to see an analysis that classifies different polluting industries based on the 3 criteria I list above. Such an exercise would provide a sense of how much of current polluting
activity is "at risk" for greening due to shame.

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