Is Pollution Value-Maximizing? The DuPont Case

Roy Shapira and Luigi Zingales

No 12323, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Pollution; Firm objectives; Environmental regulation; Information suppression (search for similar items in EconPapers)
JEL-codes: K32 L21 Q52 (search for similar items in EconPapers)
Date: 2017-09
New Economics Papers: this item is included in nep-env, nep-law and nep-res
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Citations: View citations in EconPapers (25)

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Working Paper: Is Pollution Value-Maximizing? The DuPont Case (2017)
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