Is Pollution Value-Maximizing? The DuPont Case
57 Pages Posted: 18 Sep 2017 Last revised: 19 Jul 2023
There are 3 versions of this paper
Is Pollution Value-Maximizing? The DuPont Case
Is Pollution Value-Maximizing? The Dupont Case
Is Pollution Value-Maximizing? The Dupont Case
Date Written: September 1, 2017
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
JEL Classification: K32, Q52, L21
Suggested Citation: Suggested Citation