Corporate governance, environmental regulations, and technological change

Suphi Sen*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

50 Citations (Scopus)

Abstract

This paper investigates the relationship between environmental regulations and innovation by focusing on the automobile industry in a cross-country setting. We provide empirical evidence that the presence of agency problems mitigates the negative effects of environmental regulations on overall R&D activity, which leads to full compensation when the degree of agency problems is sufficiently high. Guiding our empirical analysis, we provide a general model consistent with the structure of existing ownership data. Specifically, we model ownership structure as a combination of two extreme corporate governance types. On the one extreme there are profit maximizers, and on the other extreme there are managers who are only concerned with their private benefits. The model leads to a simple country level ownership indicator and shows that if an economy is dominated by firms with higher agency problems, then pollution tax might even increase overall R&D, while reducing pollution. According to our estimations, such an outcome is possible only for out-of-sample values of the ownership indicator, where the degree of agency problems is extremely high.

Original languageEnglish
Pages (from-to)36-61
Number of pages26
JournalEuropean Economic Review
Volume80
DOIs
Publication statusPublished - Nov 2015
Externally publishedYes

Keywords

  • Corporate governance
  • Environmental regulations
  • Porter Hypothesis
  • Technological change

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