Non-binding voluntary agreements

In reality, most voluntary agreements (VAs) with polluters are not enforceable in the sense that no legal tools are available to enforce firms’ commitments. We examine whether such VAs are able to achieve an efficient level of environmental protection when they are obtained under the legislative threat of a pollution quota. We show that they can improve social welfare relative to legislative intervention when lobbying congress is very effective and when the polluter and the regulator do not discount future costs and benefits heavily. These findings suggest that VAs should be used selectively, taking into account sector characteristics and the degree of influence of lobbying on congress.