Can CSR-Based Self-Regulation Be a Substitute for Legal Regulation? Conclusions from Public Goods Experiments

This article discusses various arguments, which question the effectiveness of self-regulation as an instrument to implement societally preferred environmental and social standards. (1) Under the behavioral assumptions of the neoclassical theory voluntary self-regulation is not possible, if it reduces company profits. (2) New experimental evidence, on which this paper is focused, shows that effective self-regulation can only be expected if certain quasi-governmental institutions exist. (3) Private companies have not sufficient information concerning the social costs of external effects. (4) Companies financed by capital markets will face a reduction of their market value, if the management engages in costly self-regulation. This can cause a hostile take-over, which leads to an exchange of the management. (5) If a company's management is no longer committed to the profit interests of its owners, it can evade any control. Taken together, these results indicate that it is not plausible that effective self-regulation in areas such as environmental protection or social standards is actually feasible under market conditions. The evidence is much more in favor with the traditional approach that environmental or social standards should be implemented by general laws under the surveillance of an executive state body