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Voluntary Environmental Initiatives as Signaling Mechanisms

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Intellectual Contribution by Bruce Paton

Contribution Title

Voluntary Environmental Initiatives as Signaling Mechanisms

Conference

Academy of Management

Year

2002

Description

Voluntary initiatives provide opportunities for corporations to signal to stakeholders concerning their environmental performance. "Signaling" occurs when economic actors reveal private information indirectly to other economic actors or to regulators through their behavior. Signaling strengthens the ability of stakeholders to influence firm behavior. Signals provide information that prices alone cannot, allowing stakeholders to provide feedback to a firm concerning environmental aspects of its products or processes. Signaling mechanisms have played an important role in the success of voluntary initiatives that has not been fully appreciated in the literature.

Two different signaling approaches have become common in voluntary initiatives. Converging mechanisms lead all targeted firms to adopt a similar, desired behavior. Separating mechanisms drive firms to segregate into different types based on their environmental performance, allowing external audiences to reward each type differently.

Careful consideration of the information role of signaling processes suggests a much more important role for voluntary programs in future environmental policy. Signaling programs can, in many instances, be deployed more rapidly and adjusted more quickly than other policy instruments, because their voluntary nature eliminates the requirements for legislative or regulatory approval.

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