Firms' Choice of Regulation Instruments to Reduce Pollution: A Transaction Cost Approach

This paper extends transaction costs economics to analyze relationships between firms and regulatory agencies. It compares the economic efficiency of firm-agency governance structures for dealing with pollution reduction. The transaction costs of three ideal type governance structures are analyzed: command and control regulation, market based mechanisms, and negotiated agreements. We propose that the choice of governance structure will depend on the strategies firms are pursuing given their transaction attributes and market opportunities.