Working Paper: NBER ID: w23866
Authors: Roy Shapira; Luigi Zingales
Abstract: DuPont, one of the most respectable U.S. companies, caused environmental damage that ended up costing the company around a billion dollars. By using internal company documents disclosed in trials we rule out the possibilities that this bad outcome was due to ignorance, an unexpected realization, or a problem of bad governance. The documents rather suggest that the polluting was a rational decision: under reasonable probabilities of detection, polluting was ex-ante optimal from the company’s perspective, even if the cost of preventing pollution was lower than the cost of the health damages produced. We then examine why different mechanisms of control – legal liability, regulation, and reputation – all failed to deter a behavior that was inefficient from a social point of view. One common reason for the failures of deterrence mechanisms is that the company controls most of the information and its release. We then sketch potential ways to mitigate this problem.
Keywords: pollution; corporate governance; shareholder value; environmental regulation
JEL Codes: K32; L21; Q52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Decision to continue polluting (Q53) | Rational shareholder-value-maximizing decision (G34) |
| Executives' cost-benefit analysis (M12) | Decision to continue polluting (Q53) |
| Acknowledgment of health risks (I19) | Executives' decision to prioritize profits (L21) |
| Probability of getting caught < 19% (K42) | Decision to continue polluting (Q53) |
| Expected legal liabilities < Profits from using C8 (G33) | Decision to continue polluting (Q53) |
| Failures of deterrence mechanisms (K42) | Decision to continue polluting (Q53) |
| Control over information (D83) | Failures in deterring pollution (Q53) |