Is Pollution Value-Maximizing? The DuPont Case

57 Pages Posted: 18 Sep 2017 Last revised: 19 Jul 2023

See all articles by Roy Shapira

Roy Shapira

Stigler Center, University of Chicago Booth School of Business; ECGI; Reichman University

Luigi Zingales

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

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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

Shapira, Roy and Zingales, Luigi, Is Pollution Value-Maximizing? The DuPont Case (September 1, 2017). European Corporate Governance Institute - Law Working Paper No. 723/2023, Available at SSRN: https://ssrn.com/abstract=3037091 or http://dx.doi.org/10.2139/ssrn.3037091

Roy Shapira

Stigler Center, University of Chicago Booth School of Business ( email )

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Luigi Zingales (Contact Author)

University of Chicago - Booth School of Business ( email )

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National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

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