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A signaling model of environmental overcompliance

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Denicolò, Vincenzo

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Abstract We present a theory of unilateral regulatory overcompliance as a signaling device. Firms that have a competitive advantage in the use of a cleaner but more costly technology overcomply in order to signal to an imperfectly informed, benevolent government that compliance costs are low, thereby triggering tougher regulation. We identify the conditions under which such an overcompliance signaling equilibrium arises, showing that there may be over-overcompliance in that firms may overcomply even when tougher regulation is not socially desirable. We also discuss the differential implications of the signaling theory as compared to other theories of unilateral regulatory overcompliance.
Classification Political Economy; Economic Policy
Free Keywords Voluntary actions; Overcompliance; Signaling; Regulation; Raising rivals' costs; D43; D82; L51
Document language English
Publication Year 2008
Page/Pages p. 293-303
Journal Journal of Economic Behavior & Organization, 68 (2008) 1
Status Postprint; peer reviewed
Licence PEER Licence Agreement (applicable only to documents from PEER project)