Voluntary Agreements Theory: Firm Impacts and Decision-Making

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Voluntary agreements are basically self-regulation by firms, and so the question is why a firm or a group of firms would want to voluntarily impose rules upon itself in the absence of any requirement to do so.  One possibility is that voluntary agreements improve participating firms’ public image and so ultimately improve both their business and environmental performance.  In this regard, issues include (1) whether and how hard it is for consumers and shareholders to distinguish between participating and non-participating firms; (2) how valuable a firm’s brand is to its sales; and (3) whether monitoring technology is cheap and reliable enough so that a third party can verify compliance.

Another possibility is that firms embrace voluntary agreements in order to head off the threat of mandatory regulation.  In this regard, voluntary agreements are at least a partial substitute for regulation—they are less adversarial, and presumably allow the affected firms to have a greater voice in their construction and so are more politically palatable to both sides.  When voluntary agreements are seen as a prelude to regulation, issues include (1) the extent to which the agreements affect the competitiveness of participating firms, especially in the international setting (since firms in some countries will adopt more stringent targets than those in others); (2) the way in which shareholders behave in response to voluntary agreements; (3) whether voluntary agreements can lower costs while still reducing emissions in a way that mandatory regulation cannot; (4) the incentive of some firms, especially in the context of industry-wide agreements, to attempt to free ride on the efforts of other firms in the industry; and (5) the transaction and administrative costs of participation.