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:||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.