Regulators and environmental groups: better together or apart?

Abstract This paper examines green alliances between environmental groups (EGs) and polluting firms, which have become more common in the last decades, and analyzes how they affect policy design. We first show that the activities of regulators and EGs are strategic substitutes, giving rise to free-riding incentives on both agents. Nonetheless, the presence of the EG yields smaller welfare benefits when firms are subject to regulation than when they are not. In addition, the introduction of environmental policy yields large welfare gains when the EG is absent but small benefits when the EG is already present.