A Theory of Environmental Risk Disclosure

The regulation of environmental risks increasingly emphasizes the awareness and empowerment of stakeholders. The success of this approach, however, seems to depend crucially on the quality of environmental disclosures. In this paper we investigate the amount and quality of the information that would be voluntarily delivered to some stakeholder by a potential polluter. We find that information may be hazier when the stakeholder is confident (or naive) a priori, the cost of analyzing the received reports increases little with their complexity, or a polluter's net expected payoff from undertaking an industrial activity that would turn out to be unsafe is small. A worried stakeholder and a low cost of producing more accurate figures, on the other hand, favor disclosure of high-quality information. By delivering information of very good quality, safe firms can set themselves apart more easily from dangerous ones the higher the relative ex post payoff from their current industrial activity. Implications of this framework for the scope and design of public programs of environmental disclosure are briefly examined.