Tim Kraft, PhD Candidate

Stanford University

Abstract

As public awareness of environmental hazards increases, a growing concern for corporations is the potential negative environmental impact of their products and the chemicals those products contain. When a substance within a product is identified as potentially hazardous (e.g., bisphenol-A (BPA) in baby bottles and triclosan in soaps and toothpastes), without regulations in place it is often difficult for a firm to financially justify the proactive replacement of the substance. From the perspective of non-governmental organizations (NGOs), groups such as ChemSec play an active role in removing potentially hazardous substances from commercial use by either targeting firms with negative press or by petitioning regulatory bodies to increase the likelihood of regulation. An NGO interested in influencing firms to replace a potentially hazardous substance must develop a strategy for how to best utilize its often limited resources.

A firm’s decisions are complicated by uncertainty in substance risk, regulations, and market sensitivity, as well as the existence of external stakeholders such as NGOs who may want the firm to develop a replacement substance. We investigate the timing and intensity of the firm’s investments to replace a substance. A two-stage dynamic program is used to model the problem. Our results indicate that large firms, in particular, must dedicate resources to monitoring and potentially planning the replacement of a substance. Although the additional management will be costly, it may prevent even larger losses such as inventory write-offs, profit losses, or liability costs. In the second part of the talk, we investigate the role NGOs play in removing a potentially hazardous substance from commercial use. We analyze the NGO’s decisions of who to target – the industry or the regulatory body – and how much effort to exert. In addition, we further investigate whether NGOs should take a pragmatic approach and partner with firms or maintain an antagonistic relationship. A game-theoretic, two-stage model is used to model the problem. Our results indicate that pressuring the regulatory body is most effective when the existing likelihood of regulation is low and the expected penalty for not being prepared for regulation is high. (Joint works with Feryal Erhun, Robert Carlson, and Dariush Rafinejad; Yanchong Zheng and Feryal Erhun)