Corporate Lobbying, Regulatory Conduct and the Porter Hypothesis

Abstract

Michael Porter, the influential Harvard management guru, has promoted the idea that compliance with stricter environmental regulations can afford ‘secondary’ benefits to firms through improved product design, innovation, corporate morale and in other ways. Once these secondary benefits are factored, the net cost of compliance is argued to be lower than conventionally thought and may even be negative. Whilst environmental economists have rejected the ‘Porter Hypothesis’ as being based on excessively optimistic expectations of the likely size of such secondary benefits the underlying ideas do enjoy significant credence in the business community. In the context of a lobbying model of regulatory policy-making we argue that the EPA should change the way it conducts regulatory policy to take account of Porter's views – even if it knows those views to be misguided. The model serves to illustrate the more general point that ‘fashions’ in management thinking can be expected to impact the optimal conduct of regulatory policy.