The Strategic Benefits of Uniform Environmental Standards

Abstract

Regulators are sometimes prevented from setting standards on a firm-by-firmbasis. Such restrictions seem inefficient, and rationales for their prevalance have been in terms of politics or fairness. While the requirement that regulation be uniform does not allow the agency to commit to future standards, it does mean that what is required from one firm must be required from them all. Regulated firms are strategic about what information they reveal to regulators — either directly or by their actions. Because the stringency of regulation faced by any particular firm is tied to industry average characteristics, that firm is less prone to hide its access to a lowcost compliance technology by inefficient choice of technique. As such the requirement of uniformity offers partial mitigation of an informational ratchet problem which makes regulation based on 'averages' attractive. We characterize alternative settings in which it is desirable or undesirable to require that standards be uniform.