DP12323 Is Pollution Value-Maximizing? The DuPont Case
Litigation, regulation, and reputation are the key mechanisms to restrain companies from profiting by externalizing larger costs on society. We employ a case study of a major externality, namely, DuPont’s emission of a toxic chemical named PFOA, to study why these mechanisms can jointly fail. By using internal company documents disclosed in trials, we show that it was ex-ante optimal from a shareholder-value perspective to pollute, even when anticipating the potential legal liability down the road. The key is the time lag: a large lag between deciding to emit the chemical and having to pay fines for it dilutes the deterrent effect of litigation. We then detail how regulation and reputation failed as well due to DuPont’s ability to control the information environment. We evaluate potential ways to mitigate the information problem, such as by introducing an environmental Qui Tam or recalibrating director oversight duties.