In addition, these trade groups will display a superior ability to solve problems of collective action- independently of group size and geographical dispersion. Let's discuss briefly why this may be the case. Earlier I argued that efficient information exchange among industry mem- bers is a key requirement for a trade group to credibly implement a voluntary code. If the personal and professional ties among the members of a trade associ- ation constitute an SW network, information about individual members is more likely to be common knowledge among all members even if the membership is large and spatially dispersed.
This is so because the shorter the characteristic path length, the easier it is for a bit of information to circulate outside the limited realm of a small cluster of member firms. I have also argued that a high degree of clustering increases the likelihood that another firm in the same cluster will apply some form of extralegal sanctions to the "defector.
Voluntary programs : a club theory perspective
Little currently is known about the network structure of specific industry groups. Nevertheless, one can predict whether the members of a trade group are embedded in an SW network by examining a few structural variables. For example, mature industries charac- terized by a stable industrial membership are more likely to be embedded in a. Conversely, young industries characterized by fast tech- nological change and with significant turnover in their membership may not be conducive to the formation of SW networks.
Another important factor affecting the formation of SW networks is the labor market. A closed labor market, that is, a labor market that has significant entry and exit barriers but displays significant internal turnover, greatly facilitates the emergence of an SW network. On the other hand, an open labor market is likely to impede the formation of SW net- works.
The reliance on consultants and other professionals by the member firms also may favor the emergence of SW networks. The preceding discussion was based on several simplifying assumptions. I didn't distinguish between firms and individuals operating within these firms, and I haven't examined the role played by the trade association in the implemen- tation process. In addition, I have not examined how information about an indus- try member may circulate, and what kind of extralegal sanctions may be avail- able to various industry constituencies.
In the next section, I begin to discuss these issues. Information Gathering in Large Groups The credibility of a voluntary code depends to a significant extent on the ability of a trade association to identify "recalcitrant" members those industrial members with a poor record of code implementation. As noted earlier, identify- ing "defectors" is a difficult task because often codes do not include any moni- toring mechanism. Under these circumstances, a code manager depends on his or her ties to industry insiders to assess the credibility of self-audits, or to obtain information about specific industry members.
If a code manager operates in a large trade group, it is unlikely that she will have direct ties to all member firms. However, this is not necessarily a serious impediment to obtaining relevant information about the member firms. The dis- cussion of SW networks suggests that direct ties to all members firms are not necessary. If the code manager is embedded in an SW network, she is likely to be separated from the relevant source of information by a small number of links. In plain English, even though she may not have a colleague working for the member firm she is seeking information about, chances are she will know some- body who does.
If the second-order acquaintance is unable to provide the infor- mation needed, he may be able to help by tapping into his own network of colleagues and acquaintances. Interestingly, a direct tie with the firm under scru- tiny may not be the most effective way to obtain sensitive information about that firm. A company official may find it problematic to provide sensitive informa- tion to a trade association representative, especially if that information can em- barrass his company.
Code managers don't depend only on their professional networks to obtain. Competitive dynamics among member firms may produce unexpected results. Interviews with representatives of the National Paint and Coatings Association NPCA have shown that information about free-riding behavior may be reported to the trade association by firms that have been put at a competitive disadvantage by free-riders: Participating firms may have a strong incentive to ensure that their competitors won't gain an unfair competitive ad- vantage by poorly implementing the code.
How rival firms learn about their competitors' standards of implementation is not always clear, and the modality varies from industry to industry. For example, it appears that in the pharmaceuti- cal industry, senior vice presidents for environment, health, and safety entertain cordial relations with each other and exchange relevant information. Representa- tives of large corporations have made similar statements on occasion. Skillful code managers may renew and expand their SW networks in several ways: by organizing training events focused on implementation of the code; by convening meetings dedicated to regulatory, technical, and other issues of com- mon interest; and by participating in annual industry meetings, national confer- ences, professional meetings, and social gatherings.
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Whether in reality code man- agers consciously pursue this strategy is an important question that has not yet received much attention. But who is in a position to provide good, reliable information about a firm's efforts to implement a code? The most likely source of reliable information is neither the top executive nor the line personnel, but the mid-level manager re- sponsible for the program's implementation. Individuals in top management po- sitions are unlikely to share embarrassing or damaging information with trade association representatives.
On the other extreme, line personnel are in a much better position to share relevant information with outsiders. However, they are not likely to have strong ties to trade association managers or to other industry practitioners. By contrast, mid-level managers are embedded in networks of pro- fessional ties that may include several other firms outside their local community. Unlike top management, their position may allow them to share information about their firm' s deficiencies with their professional peers and with trade asso- ciation representatives.
But information alone doesn't guarantee that the members of a trade group will properly implement the code. In the absence of some form of sanctioning, the code is unlikely to become an effective tool of environmental management. In the next section, I examine pos- sible sources of extralegal sanctioning and discuss their relevance. Sources of Extralegal Sanctioning The absence of explicit sanctions from most voluntary codes shouldn't be interpreted as a demonstration of untrustworthiness.
As this section shows, the. Several other organizations operating in a firm's institutional environment may play an important role in ensuring the code's credibility. The improper imple- mentation of the code' s requirements may trigger guilt or shame, may damage a firm's reputation, and may have negative economic consequences. Guilt and shame speak to the moral dimension of individual choices, to the internalization of moral values and norms.
The economic literature tends to dismiss this element of social regulation, but there is little doubt that over the past 20 years, the business community as a whole has dramatically changed its attitudes towards the environment. Of more immediate relevance to this discussion are sanctions that may damage a firm's or an individual's reputation.
A large body of literature suggests that reputational considerations are a key aspect of many social inter- actions, including business dealings. It can translate into a loss of sales and revenues, a lower stock valuation, higher insurance premiums, the loss of friends and colleagues, and in extreme cases, a ruined professional career. Several organizational actors in the institutional environment of a firm may play an active role in ensuring the proper implementation of a code.
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In addition to the trade association, the parent company, other industry members, large cus- tomers Walton et al. Empirical studies that assess the role of these constituencies in ensuring a credible code implementation are still rare, but tend to support the view that their aggregate impact can be significant. For example, in developing countries, local communities may play an important role in im- proving environmental protection in the absence of an effective regulatory sys- tem. Finally, how does a trade association deal with noncompliance?
It is well known that trade associations usually have a limited sanctioning capacity. A trade association's ability to sanction noncompliance essentially reflects its bar- gaining power, that is, the costs and benefits associated with staying versus leaving the association. A trade association's sanctioning capacity is strength- ened if the membership provides highly valuable and exclusive services to the. On the other end, a firm's decision to leave a trade association may be associated with significant costs. Leaving the trade group may result in being perceived as a liability by potential business partners; may be interpreted by the public, environmental groups, and regulators as an indication of a poor environmental record; and may increase the costs of insurance and financing.
National regulators are in an excellent position to improve the attractiveness of membership. Absent such enticements, trade association officials must resort to different strategies. For example, these officials may make a strategic use of their position as "information brokers" in the industry network. In essence, their position as information bro- kers confers on them the power to trigger what may be called an extralegal "sanctioning cascade.
Depend- ing on the structure of the industry network, it can generate a considerable amount of gossip and outrage.
An Economics Perspective on Treating Voluntary Programs as Clubs
Intense gossip can lead to information distortion and unfairly damage a firm's reputation. From Strategic Behavior to Learning Processes The credibility of voluntary codes cannot be discussed exclusively in terms of information diffusion and extralegal sanctioning mechanisms. The incomplete nature of many voluntary codes reduces considerably the relevance of informal sanctions: For sanctions to be fairly imposed, there must be a consensus on what constitutes a "violation" or an "infraction.
In this section, I focus on the role played by environmental managers in shaping the expectations related to implementation of the code. It consists of extensive and repeated discussions among environmental professionals, com- bined with regular information exchange. It is, in essence, a process of mutual learning that leads to a common understanding of what constitutes a proper implementation of the code.
It is also a process that facilitates the establishment of new ties among environmental professionals "horizontal" ties and reinforces the relationship between these professionals and the trade association "vertical" ties , thus contributing to the formation of what some scholars have called a "community of practice" Gherardi et al. Developing a common understanding of what constitutes acceptable interpreta- tions of generic code requirements is key to reconciling conflicting demands for accountability and flexibility, it enables customization of a consensus about dif- ferences rather than uniformity a demonstration of the code' s ability to recon- cile effectiveness and accountability.
The tension between professionalism and the firms' interest may lead to a temporary situation in which the environmental professionals develop a common understanding of what constitutes the proper implementation of the code that differs from the position taken by some of the participating companies. These conflicts may be resolved in several ways. One possible way to resolve these disputes is for the professional communi- ty to simply ignore this disagreement. This is not likely to be a durable solution because as it creates a dangerous precedent.
The conflict is also likely to resur- face at a later time in a more virulent form. A second option is to lower expecta- tions to avoid possible conflicts. However, the evi- dence in support of this claim is not overwhelming. The third and final option is to reallocate the responsibility for resolving this matter from the community of environmental managers to the trade association to be discussed later. An agreement on what constitutes a proper implementation of a voluntary code does allow environmental and code managers to determine whether a firm is "complying" with the code's requirements, but it doesn't necessarily make the use of extralegal sanctions more effective.
A firm may have implemented a code poorly for several reasons. For example, a firm may lack scientific and technical expertise. A recent joint effort by the EPA and the American Chemistry Council to determine the root causes of regulatory noncompliance concluded that "hu- man error" and "procedures" operating procedures not followed are two of the main causes of noncompliance U.
Finally, financial resources to properly implement the code may be in short supply. Thus, one should distinguish between voluntary and involuntary noncompliance. Involuntary noncompliance demonstrates the limits of assessing the credi- bility of voluntary codes from a narrowly defined economic perspective.
If in- voluntary noncompliance is a significant aspect of a poorly implemented code- and there is significant evidence that implementing these codes can be.
If noncompliance can be attribut- ed to limited technical and scientific expertise or to organizational barriers, the effective implementation of a voluntary code may depend on the availability of training and technical assistance and on processes of information sharing and mutual learning, rather than on sanctions. A collaborative approach to the code implementation has a dramatic impact on the code manager' s ability to gather accurate information about member firms. It also enables environmental managers to freely exchange with each other even sensitive bits of information about implementation problems.
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Conversely, legal- istic and confrontational relations are likely to undermine the free flow of knowl- edge and information among environmental professionals, and between these professionals and their trade group. Rather, it suggests that sanctioning noncompliance is itself a choice that must be based on carefully assessing its costs and benefits.
Those who favor the imposition of strict sanc- tions all too often are oblivious to the possibility that these sanctions legal or otherwise may be associated with considerable costs. By sanctioning noncom- pliant behavior in an inappropriate or excessive way, a trade group may compro- mise its future ability to shape the implementation process. This means that the role of code managers is subtler than usually assumed. Code managers are neither "private cops" nor mere "cheerleaders. Their central position in the industry network confers on them the power to address disputes among member firms over implementation issues, between industry interests and the public sector, and between environmental groups and member firms.
In short, they become what some scholars have dubbed "crosscutting ties. Accurate, public sources of information on environ- mental performance are rarely available. Furthermore, there is no consensus among scholars and practitioners on how to define measures of environmental performance that would allow meaningful interfirm comparisons. On the other end, evaluating voluntary codes on formal criteria alone may be misleading. This chapter suggests that a better way to assess voluntary codes is to.
This includes industry networks, information diffusion and in- formation exchange, extralegal sanctioning mechanisms, and interorganizational learning, among others. The concept of credibility advanced in this chapter provides several lessons for the design of voluntary agreements. First, a contractual relationship between a regulatory agency and a trade association is likely to transform the relationship of the trade association to its members from collaborative to confrontational.
In other words, it may crowd out collaborative dispositions and undermine infor- mation exchange and mutual learning. In addition, it may impair the trade asso- ciation's ability to mediate among opposing interests. Whether regulators could avoid these outcomes by providing significant benefits to participating firms remains to be seen. Second, most industrial codes may be characterized as an architecture of environmental management. Current voluntary codes are not designed to directly address highly specific environmental concerns.
The incomplete, open-ended nature of many voluntary codes is typical of social obligations that are impervi- ous to formalization. As a result, they are ill suited to become part and parcel of voluntary agreements. Third, developing an in-depth knowledge of the implementation processes should enable decision makers in the public sector to focus on improving the self-regulatory and learning capacity of a trade association and its members, rather than concentrating on specific elements of the code. NOTES 1 The term "voluntary initiative" is not particularly accurate, as some trade groups have made their codes a condition of membership.
However, for the sake of clarity I will use this term through- out the chapter. Voluntary initiatives must be distinguished from "voluntary agreements.
However, these fears may be compensated by concerns about antitrust laws. Even though this code has existed for well over a decade, only one comprehensive evaluation has been conducted so far King and Lenox, Their statistical sophistication and thoroughness notwithstanding, the authors of this study were unable to draw firm conclusions about the effectiveness of Responsible Care.
Other efforts at evalu-. Consider, for example, the market for used cars. Prospective buyers are usually unable to determine whether they are getting a "lemon," only the salesperson has that information. This is a classic case of asymmetrical information Akerlof, The clustering coefficient of this subgraph is the fraction of this maximum that is actually realized. The clustering coefficient of the entire graph is the average of these fractions calculated for every node Watts, lb It is a global property of the network.
Voluntary programs : a club theory perspective
In this chapter, I am concerned with networks of environmental professionals and top executives, and not with rela- tionships among boards of directors. As I will show, individuals and organizations with weak ties to otherwise disjointed networks are in an excellent position to mediate between conflicting interests and to influence the outcome of these conflicts. An indirect illustration of this argument is provided by Dietz and Rycroft Accordingly, trade associ- ation representatives carefully avoid any talk of "enforcement action.
Also see the discussion in Brown and Duguid Although this terminology occasionally may be useful, it tends to obscure important differences within each cate- gory. For example, a well-reputed industry insider and an international consulting firm both can be described as "third parties.
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An NGO would take the opposite view. The groundwork was laid by several econo- mists in the s Mailath and Samuelson, ; Kreps et al. Economic historians have provided vivid illustrations of the role of reputational incentives in sus- taining trade Greif, , , ; Milgrom et al. During the ls, many legal scholars recognized the relevance of reputational incentives in sustaining social norms Schwarcz, in press; Coffee, ; Posner, , ; Choi, ; Bernstein, ; Ellickson, , ; Charny, Political scientists have studied the role of reputation, guilt, and shame as a means of informal policing Braithwaite, , Surprisingly, sociologists with few exceptions Etzioni, ; Raub and Weesie, have been slow to recognize the importance of this topic.
The automo- bile industry is a case in point. A diamond trader whose reputation had been damaged by baseless gossip was able to restore his good name by posting a rebuttal on the DDC's bulletin board.
These differences, however, don't necessarily constitute evidence of inadequate code implementation. In conclusion, the chapter develops Show More Show Less. Keywords: economic model ; club theory ; private provision ; warm glow ; green good ; socially optimal club ; equilibrium club ; voluntary programs ; public goods provision. Subjects: Political Theory. How to subscribe Recommend to my Librarian. Users without a subscription are not able to see the full content. Please, subscribe or login to access all content.
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