The Regulation Dilemma: Cooperation and Conflict in Environmental Governance

Abstract

Across the United States and around the world, businesses have joined voluntary governmental and nongovernmental environmental regulations. Such codes often require firms to establish internal environmental management systems to improve their environmental performance and regulatory compliance. Meanwhile, governments have been offering incentives to businesses that self‐police their regulatory compliance and promptly report and correct violations. This article examines how governmental regulatory enforcement can influence firms' compliance with mandatory and voluntary regulations. Cooperative regulatory enforcement—in which firms self‐police their environmental operations and governments provide regulatory relief for voluntarily disclosed violations—yields optimal win–win outcomes, but only when both sides cooperate. If firms are likely to evade compliance, governments are better off adopting a deterrence approach. If governments insist on rigidly interpreting and enforcing laws, firms may have incentives to evade regulations and not voluntary codes. Cooperation is possible through credible signals between firms and government.

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