Minimizing Costs, Maximizing Sustainability
68 Pages Posted: 5 Oct 2020 Last revised: 9 Mar 2021
Date Written: June 29, 2019
Do strong incentives to cut costs lead firms to neglect negative externalities? We find that cost-cutting incentives can be environmentally friendly. To arrive at this conclusion, we examine uniquely detailed plant-level data of private and public firms in the most polluting industry in the US - electric utilities. To establish causality, we exploit the staggered passage of restructuring legislation, which opened the market to competition and incentivized utilities to cut costs. Following the restructuring, plants moved to cheaper but less polluting production processes. In addition, competition forces have improved allocation of operation across competing plants, contributing further to pollution reduction.
Keywords: Product Market Competition, Environment,ESG
JEL Classification: G30, D22, Q52, Q53
Suggested Citation: Suggested Citation