Objective(s) of the Research Project:
We will examine several important examples of attempts by industry to regulate their own behavior to determine: (1) why firms choose to form or join such initiatives; (2) how voluntary regulations have influenced behavior in their industries; and (3) how these decisions and behavioral changes differ with the composition and structure of the voluntary regulation and the industries in which they operate. We will analyze both the current functioning of some common examples, and develop and test more general models of voluntary regulations. We will use our empirical findings and validated models to propose heuristics for managers and policymakers.
Progress Summary/Accomplishments:
At the initiation of the project, the researchers had been granted access to important U.S. Census Bureau data. A dispute between the Census Bureau and the Internal Revenue Service (IRS) caused all pending studies to be voided; thus, the project was hampered by a lack of access to these data. Subsequently, a rewritten census proposal was resubmitted to the Census Bureau and received first round approval. It is now being revised based on the reviewers' comments. We hope to have access to Census data by the end of the summer, but we are going ahead with our research and believe that we can complete all projects with or without Census data.
Progress was achieved in both developing and extending theories of industry self-regulation and empirically exploring the actual effect of important examples of industry self-regulation.
Theory Development
Theory development proceeded on two fronts. Researchers Radner and Dutta developed a model of self-regulation to solve problems of global warming. Their model suggests that under some circumstances, a specific type of industry self-regulation can improve on the non-cooperative business-as-usual case. They show that asymmetric information can impede the creation of viable industry self-regulation and explore how the ability to transfer technology at cost might influence incentive-compatible self-regulation. Their model allows evaluation of the conditions under which industry self-regulation can approach the welfare optimum.
The Radner model investigates only one type of industry self-regulation. King, Lenox, and Barnett developed an informal description of the conditions under which other types of industry self-regulation are likely to form. They consider the issue of missing or asymmetric information in causing the formation of Industry Self-Regulation (ISR). They describe when industry self-regulation is likely to lead to an elite club of member firms and when it is likely to lead to near universal acceptance of an industry standard. They also describe how the strategies of firms may interact, and how ISRs can take different forms and have very different welfare consequences.
Empirical Research
Responsible Care. The team continued to push ahead on research on the chemical industry's Responsible Care (RC) program. A prior study of environmental performance of RC membership was published by the Academy of Management Journal. As an extension to this initial research, in a second paper (submitted) the investigators consider how RC affected the financial performance of participants and nonparticipants. We find that while most of the benefit of industry self-regulation spills over to nonmembers, member firms continue to participate to prevent collapse of the self-regulation effort.
This research suggests that large firms in dirty segments of the chemical industry participate in the RC program to prevent a damaging change in general industry conditions. These firms take this action at considerable financial cost to themselves. Whatever the intentions of these firms, enough poor performing firms take advantage of the shelter provided by RC so that the overall members of the program have lower environmental performance than nonmembers. Clearly, the conflicts within this situation must be resolved. If the environmental performance of the program becomes generally known, the program may no longer forestall regulation or improve stakeholder relations. Alternatively, evidence of the inferior environmental performance of RC may spur a redesign of the program and help it to realize its original promise. Such a redesign may now be taking place.
Other Examples of Industry Self-Regulation. The team also conducted research on other examples of industry self-regulation. We explored adoption patterns for ISO 14000 to understand initial participation in international environmental standards. Using techniques developed during our RC studies, the team conducted a preliminary comparison study of several environmental codes. Preliminary findings suggest that codes with third party certification and explicit sanctions have better success in preventing adverse selection and moral hazard.
We also conducted research on ISO 9000 that, while not explicitly an environmental code, provides an important opportunity to better understand adoption and performance consequences of industry standards. ISO 9000 has diffused more broadly and more completely than environmental codes, so it provides a better source of empirical evidence. Moreover, in one study conducted under the project, we found that ISO 9000 adoption predicts environmental improvement and adoption of the ISO 14000 standard. This study reinforces the hypothesized relationship between Lean Production practices and environmental performance.
Ann Terlaak of the Bren School of the University of California at Santa Barbara joined the team to conduct Ph.D. thesis research on how the nature of initial members in an industry standard can affect later patterns of adoption and success. She authored a theory paper based on the topic that was accepted by the Academy of Management for its annual conference. A second, empirical, paper will be presented this summer at a prestigious conference in Denmark. This latter paper suggests that in some industries, participating firms have been able to create (or make use of) conditions that bar adverse selection. If so, this paper could provide important evidence about the conditions under which self-regulation is feasible, and could be used to validate some of the assumptions of the Radner/Dutta model.
Causes of Industry Self-Regulation. According to many theories, industry self-regulation occurs when firms must share a common resource. King, Lenox, and Barnett (2001) explain how this resource could be a commonly held industry reputation. In his Ph.D. thesis, Mike Barnett (Stern School of Business, New York University) is investigating how accidents effect the stock price of both the focal firm and other firms in the same industry. He expects to show the conditions under which an Industry Self-Regulation like RC can control the financial spillover of such negative events. This research currently is underway.
Publications/Presentations:
King A, Lenox M, Barnett M. Governing the reputation commons: opportunities and barriers to industry self-regulation. In: Hoffman A, Vantresca M, eds. Organizations, Policy, and the Natural Environment: Institutional and Strategic Perspectives (to be published, 2001).
King A, Lenox M. Who adopts management standards early? An examination of ISO 14001 certifications. In: Best Paper Proceedings of the Academy of Management Annual Conference (to be published, 2001).
King A, Lenox M. Lean and green? An empirical examination of the relationship between lean production and environmental performance. Production and Operations Management (to be published, 2001).
King A, Lenox M. Industry self-regulation without sanctions: the chemical industry's responsible care program. Academy of Management Journal 2000;43(4):698-716.
King A, Lenox M. Does membership have its privileges? Analyzing who benefits from industry self-regulation. Strategic Management Journal (submitted for publication, 2001).
King A, Lenox M, Nash J. Adverse selection, sanctions, and industry self-regulation. 2000 (working paper).
King A, Lenox M, Barnett M. Governing the reputation commons: opportunities and barriers to industry self-regulation. 2000 (working paper).
Dutta PK, Radner R. A strategic analysis of global warming. Presented at the Stern School of Business, New York University, February 2001.
Dutta PK, Radner R. Choosing cleaner technologies. Presented at the Stern School of Business, New York University, April 2001.
Barnett M. Industry self-regulation and stock price movements. Presented at the Consortium on Competitiveness and Cooperation (CCC) Colloquium, Duke University, Raleigh, NC, April 2001.
Barnett M. Waves of collectivizing: a dynamic model of competition and cooperation over the life of an industry. Presented at the 2001 Academy of Management Conference, Washington, DC, August 2001.
King A. Voluntary environmental standards: furthering moral suasion while preventing more hazard. Presented at the EPA/National Science Foundation Conference: Beyond Compliance: What Motivates Environmental Behavior? Washington, DC, June 4, 2001.
King A, Lenox M. Who adopts management standards early? An examination of ISO 14001 certifications. Presented at the 2001 Academy of Management Conference, Washington, DC, August 2001.
King A, Lenox M, Barnett M. Governing the reputation commons: opportunities and barriers to industry self-regulation. Presented at the 2000 Kellogg Conference on Organizations, Policy and the Natural Environment, Northwestern University, Evanston, IL, May 2000.
King A, Lenox M. Industry self-regulation without sanctions: the chemical industry's responsible care program. Presented at the Institute for Environmental Studies, University of Pennsylvania, January 27, 2000.
King A. Opportunities for industry self-regulation. Presented at the Greening of Industry Conference, Chapel Hill, NC, November 14, 1999.
Terlaak A, King A. Do firms get run over by bandwagons? Exploring the effect of early adopters on the diffusion of the ISO 9000 management standard. Presented at the Nelson and Winter Conference, Aarlborg, Denmark, June 2001.
Terlaak A. Governmental solutions to problems of transferring environmental best practices. Presented at the 2001 Academy of Management Conference, Washington, DC, August 2001.
Radner R. A strategic analysis of global warming. Presented at the Environmental Economics Seminar, Columbia University, October 2000.
Radner R. A strategic analysis of global warming. Presented at the National Science Foundation/CEME Decentralization Conference, Northwestern University, April 27-29, 2001.
Radner R. A game-theoretic approach to global warming. Presented at INSEAD, May 2001.
Future Activities:
Theory development will continue along several fronts. Papers based upon the formal game-theoretic models will be completed and submitted to a journal. Initial work on more informal theories will be modified and improved. One modification will be submitted to the Academy of Management Review. Another version will be directed toward the practitioner audience and will be submitted to Harvard Business Review.
Empirically, the research team will continue to study six industry self-regulation programs, including: (a) the chemical industry's RC program, (b) the petroleum industry's STEP program, (c) the textile industry's E3 program, (d) the pulp and paper industry's Sustainable Forestry Initiative, (e) the International Standards Organization's ISO 14000 environmental management standard, and (f) the International Standards Organization's ISO 9000 quality management standard. These studies will investigate the determinants of membership in these programs and how each effect the performance of member firms and the industry as a whole.
The team also will explore the underlying logic of industry self-regulation by evaluating the degree to which events effect the stock prices of similar firms. We will seek to explore when negative events spill over to other firms in the same industry. We will explore how industry self-regulation effects this spillover.
To help synthesize our theoretical and empirical work on the subject, we plan to organize a conference and compile an edited book. The team also is conducting several internal projects to help synthesize research in the area. Ann Terlaak is conducting a review of the literature on the link between theories of technology diffusion and the diffusion of industry standards. This review will become one of the chapters of her thesis. Mike Barnett also is conducting a review of the empirical literature on reputation and industry self-regulation. Finally, Andrew King, Mike Lenox, and Mike Barnett are creating a more general paper synthesizing several streams of research on collective action and industry self-regulation. This paper will be submitted to the Academy of Management Review.
Supplemental Keywords: public policy, decision making, cost benefit, preferences, public good, Bayesian, socioeconomic, compensation, conservation, sociological, social science, modeling, analytical, surveys, measurement methods.
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Last Updated: September 17, 2001