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
(1) 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
Implications of model…
 Emissions = f (incentive, ability)
General Propositions:
(1) Higher penalty => more compliance
(2) More monitoring => more compliance
(3) More firm cares about reputation => more
compliance & over-compliance
(4) Financial ability matters
Why Firms Comply/Violate Environmental Laws?
(1) 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
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) Local vs. 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
Newer Question: Why Do Firms Go Beyond Compliance?
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)
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”??