Negotiating a voluntary agreement when firms self-regulate

Does self-regulation improve social welfare? We develop a policy game featuring a regulator and a firm that can unilaterally commit to better environmental or social behavior in order to preempt future public policy efforts. We show that the answer depends on the set of policy instruments available to the regulator. Self-regulation improves welfare if the regulator can only use mandatory regulation, but it reduces welfare when the regulator opts for a voluntary agreement. This suggests that self-regulation and voluntary agreements are not good complements from a welfare point of view. We derive policy implications, and extend the basic model in several dimensions.