Organizational strategy, managerial decision-making, and market-based environmental policies: utility company bidding behavior in the sulfur dioxide allowance trading auctions

Abstract

An environmental policy approach gaining increasing acceptance among regulators, industry, and environmental groups is the use of market-based instruments. The growth of such programs results in an important research need to understand how organizations respond to these tools. Our managerial and organizational decision-making study examines the sulfur dioxide allowance trading program, part of the effort to reduce acid rain in the United States. This is one of the most visible and significant environmental market-based approaches as it is being implemented on a nationwide scale and impacts an important corporate sector—the utility industry. Our study seeks to understand why utility company participation in this program, as measured by bidding for allowances in auctions, has been under 10% of utilities able to bid, despite the low price of the allowances relative to alternative sulfur dioxide control measures. We utilize the organizational strategy literature to develop and structure our hypotheses. Our data collection method involves a mail survey to management's of 142 utility companies to assess their attitudes concerning a number of variables which were hypothesized to influence company bidding in the March 1994 allowance auctions. This attitudinal approach was selected since the newness of the sulfur dioxide allowance trading program results in utility decision-making significantly depending on management's perceptions of factors, such as future retaking rulings, state regulations, and public opinion, which are not easily observable or measurable by other methods. The study finds that a range of organizational strategy models—economic, behavioral, stakeholder, and learning—are useful for understanding the observed behavior. A number of variables consistent with each model are shown to influence managerial decision-making to bid in the auctions. These variables include the expected treatment of the carrying costs of the allowances by public utility commissions, the costs of the allowances relative to other compliance strategies, an auction design characteristic, public opinion in the utility's service area, the importance of the allowances to meet demand growth, the competitive environment in which the utility operates, and the innovativeness of the utility. The findings are useful for gaining greater insight into managerial decision-making and organizational strategy as well as for improving both this specific market-based policy tool and the increasing number of market-based policy tools applied to other environmental issues. © 1997 John Wiley & Sons, Ltd.