Abstract
The evidence suggests that a surprisingly large number of firms comply with pollution standards even though expected penalties for non-compliance are quite low. This paper establishes an environmental social norm model that embodies collective environmental actions among firms. It provides a plausible explanation for these puzzling empirical findings. In this social norm framework, we also explore how the extrinsic pricing incentive affects the intrinsic environmental morale among firms. By taking into account the crowding-out effect of pricing incentives, we show that pollution taxes may not be an effective tool in fighting pollution.
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