Morally-Motivated Self-Regulation

Some individuals and firms voluntarily mitigate the harmful consequences of their eco-nomic activities in situations in which they could free ride. In the context of a random matching model where citizens play a free-rider game, this paper examines the scope of self-regulation motivated by altruism or warm glow preferences. Moral preferences are represented as stronger among neighbors than among strangers, and those preferences may be unconditional or reciprocal. The focus is on the role of organizations in increasing self-regulation by addressing free-rider problems. Social label, certification, and enforcement organizations are considered, as are public regulation and social pressure applied by an activist NGO funded by voluntary donations by citizens. Social label and certification organizations can exist with reciprocal but not unconditional altruism, and they expand the scope of self-regulation, but their effect is limited. Enforcement organizations expand the scope of self-regulation for both unconditional and reciprocal altruism, and for-profit enforcement is more aggressive than non-profit enforcement. Public regulation can also overcome the free-rider problem, but self-regulation can crowd out the political support for public regulation, whereas it may not crowd out private organization