DP12323 Is Pollution Value-Maximizing? The DuPont Case

Author(s): Roy Shapira, Luigi Zingales
Publication Date: September 2017
Keyword(s): Environmental Regulation, Firm Objectives, pollution
JEL(s): K32, L21, Q52
Programme Areas: Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12323

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 harmful pollution was a rational decision: under reasonable probabilities of detection, polluting was ex-ante optimal from the company's perspective, albeit a very harmful decision from a societal perspective. We then examine why different mechanisms of control - legal liability, regulation, and reputation - all failed to deter socially harmful behavior. 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.