Self-Regulation and Social Welfare: The Political Economy of Corporate Environmentalism John W. Maxwell * Thomas P. Lyon ** Steven C. Hackett *** March 1998 Abstract We extend the economic theory of regulation to allow for strategic self-regulation that preempts political action. When political “entry” is costly for consumers, firms can deter it through voluntary restraints. Unlike standard entry models, deterrence is achieved by overinvesting to raise the rival's welfare in the event of entry. Empirical evidence on releases of toxic chemicals shows that an increased threat of regulation (as proxied by increased membership in conservation groups) indeed induces firms to reduce toxic releases. We establish conditions under which self-regulation, if it occurs, is a Pareto improvement once costs of influencing policy are included. JEL Codes: D72, K32, L51, Q28 Keywords: Regulation, environment, self-regulation, political economy We would like to thank Roger Noll, Peter Pashigian, Juergen von Hagen, and seminar participants at Chicago, Indiana, the London School of Economics, Northwestern, Penn State, Purdue, Tennessee, the University of Siena and the American, Western, Eastern and Canadian Economic Association meetings for helpful comments. We also thank Chris Decker for expert research assistance. Lyon gratefully acknowledges the Indiana University School of Business, the I.U. School of Business Alumni Association, and the University of Chicago’s George J. Stigler Center for the Study of the Economy and the State for financial support. * Kelley School of Business, Indiana University. ** Kelley School of Business, Indiana University. *** School of Business and Economics, Humboldt State University.