Industry self‐regulation and adverse selection: a comparison across four trade association programs

Abstract

In an attempt to avoid costly regulation and liability as a result of externalities, a number of trade associations have promoted industry self‐regulation – the voluntary association of firms to control their collective behavior. However, previous studies have found that, without explicit sanctions for malfeasance, such self‐regulatory programs are likely to attract more polluting firms. In this paper, we examine four environmental self‐regulatory programs in the chemical, textile, and pulp and paper industries. Using a sample of over 4000 firms within these industries, we find evidence that in at least one program more polluting firms tended to join, while in another cleaner firms were more likely to join. We propose that differences in the structure of the programs drive the appearance of this form of adverse selection. In particular, we speculate that only when self‐regulatory programs have explicit sanctions for malfeasance may they avoid adverse selection problems. Copyright © 2003 John Wiley & Sons, Ltd and ERP Environment.