Public Disclosure Programs vs. Traditional Approaches for Environmental Regulation: Green Goodwill and the Policies of the Firm

A Public Disclosure Program (PDP) is compared to a traditional environmental regulation (exemplified by a tax/subsidy) in a simple dynamic framework. A PDP aims at revealing the environmental record of firms to the public. This information affects its image (goodwill or brand equity), and ultimately its profit. In our model, this impact is endogenous, i.e., a firm polluting less than its prescribed target would win consumer's sympathy and raises its goodwill, whereas it is the other way around when the firm exceeds its emissions quota. The evolution of this goodwill is assumed to depend also on green activities or advertising expenditures. Within this framework, we analyse how a PDP affects the firm's optimal policies regarding emissions, pricing and advertising as compared to a traditional regulation. We show that advertising acts as a complementary device to pricing and that emissions are increasing in goodwill. We also conclude that the effects of a PDP are more pronounced than those of traditional instruments for firms with a high goodwill. Moreover, we study under which conditions a PDP may be profit improving and we connect this issue to the possibility that a PDP can induce firms to overcomply with the standard. The numerical value of the emission target is rather innocuous in a market-based setting but it turns to be a crucial variable in the presence of a PDP. The theoretical results are complemented with a numerical illustration.