where ISOi is an indicator variable for the adoption of ISO 14001, X1i is a vector of control variables, and eijðj 1⁄4 A,RÞ is an idiosyncratic error. Since both net benefits are likely to depend on similar unobserved factors, eiA andeiR are expected to be correlated with each other. Hereafter, we call Eqs. (1) and (2) the ‘‘assess equation’’ and the ‘‘require equation,’’ respectively.
ASSESS i and REQUIRE i are not observed. What we actually observe is whether the facility assesses its suppliers in terms of their environmental performance (ASSESSi) and whether it requires its suppliers to undertake environmental measures (REQUIREi). We assume that ASSESSi equals one if ASSESS i Z 0 and zero otherwise. That is, the facility assesses its suppliers if the net benefit from doing so is greater than or equal to zero. REQUIREi and REQUIRE i are related in an analogous fashion.