Default Risk, Productivity, and the Environment: Theory and Evidence from U.S. Manufacturing

Dana Andersen

No 2017-8, Working Papers from University of Alberta, Department of Economics

Abstract: This paper develops a general equilibrium model with heterogeneous firms to analyze the effect of default risk on production-generated pollution emissions. The model analytically divides the effect of default risk into three distinct effects: the market-size, technology-upgrading, and selection effect. Conceptually, an increase in default risk raises equilibrium borrowing costs, thereby precluding investment in a technology upgrade among a subset of firms (technology-upgrading effect). As a consequence, the economy consists of more numerous (market-size effect) but less productive and more pollution-intensive firms (selection effect). Because the effects are confounding in nature, the effect of default risk on aggregate pollution emissions and emissions intensity is an empirical question. To answer this question, this paper estimates the model’s key parameters using a unique dataset with establishment-level credit scores and a composite measure of pollution emissions for a panel of manufacturing firms in the United States. Using a two-step procedure where default risk is estimated in the first stage, the results indicate that the estimated elasticity of emissions intensity and productivity with respect to default risk is 0.89 and -0.16, respectively. Next, I use the theoretical model to leverage the coefficient estimates to estimate the effect of economy wide default risk on aggregate pollution emissions, demonstrating that default risk increases aggregate emissions and emissions intensity, primarily as a consequence of the technology-upgrading effect. Finally, this paper demonstrates that historical changes in economy-wide default risk can generate economically significant changes in pollution emissions.

Keywords: Default risk; pollution emissions; firm heterogeneity; general equilibrium (search for similar items in EconPapers)
JEL-codes: D50 L60 Q50 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2017-08-21
New Economics Papers: this item is included in nep-ene, nep-env and nep-res
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Journal Article: Default Risk, Productivity, and the Environment: Theory and Evidence from U.S. Manufacturing (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:ris:albaec:2017_008

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