Abstract
We provide an explanation for voluntary overcompliance, the phenomenon in which firms voluntarily choose to overcomply with environmental regulations. In our model, a polluting firm faces a rent-seeking contest with an environmental group. By making a small concession beforehand, i.e. by overcomplying voluntary, the firm lowers the stake the environmental group has in the rent seeking contest, which lowers the group’s lobbying effort in that contest. Voluntary overcompliance increases social welfare, yet the firm undersupplies overcompliance from a welfare point of view. An increase in the effectiveness of lobbying of the environmental group, increases the level of overcompliance.
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Notes
That is, the reaction function of one player is decreasing in the action (in this case, the amount of lobbying) of the other player.
Thanks to an anonymous referee for bringing this paper to my attention.
That is, it assures that we do not have a corner solution; see also footnote 4.
We therefore need the assumption that \(c^{\prime }(0)=0\): without it, we may have \(f(0)>0\), which could imply that \(C^{\prime }(r)>0\) for all r. If that were the case, the firm would choose \(r^{*}=0\). Hence the assumption \(c^{\prime }(0)=0\) is sufficient (though not necessary) to have voluntary overcompliance.
Note that any r for which \(f(r)=0\) and \(f^{\prime }(r)<0\) has \(C^{\prime \prime }(r)<0\) and is a local minimum.
Thanks to an anonymous referee for suggesting this extension.
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Haan, M.A. A Rent-Seeking Model of Voluntary Overcompliance. Environ Resource Econ 65, 297–312 (2016). https://doi.org/10.1007/s10640-015-9973-2
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DOI: https://doi.org/10.1007/s10640-015-9973-2