1 Self-Regulation and Environmental Protection — Bargaining in the Shadow of Rent-Seeking

Self-regulation is often seen as a means to make use of information, which is unavailable to governments or rule-setting government agencies. Critics fear that self-regulating industries do not only use their superior information to achieve a given level of environmental or consumer protection in a cheaper way, but also use their self-regulatory power to reduce this level of protection. This paper studies self-regulation as a three-stage rent-seeking-and-bargaining process: at the first stage, the industry to be regulated and an environmental interest group invest in lobbying for or against self-regulation. At the second stage, the same parties either lobby to achieve favorable governmental regulation or, respectively, bargain on the content of self-regulation. Should bargaining fail, they enter the third stage of the game, which again is lobbying for or against self-regulation. The paper shows under what conditions the environmental interest group gains from self-regulation, given that protection of their interests becomes cheaper by self-regulation, but their influence in the second, decisive stage is weaker under self-regulation than under government regulation. The paper also shows that higher bargaining power of the environmentalists at the bargaining stage is not only to the benefit of the environmentalists, but may also be to the advantage of the regulated industry