Corporate Environmental Policy and Product Market Competition
51 Pages Posted: 5 Oct 2020 Last revised: 7 Oct 2020
Date Written: June 29, 2019
Does product market competition affect corporate environmental policy? It is commonly believed that firms in competitive environments have stronger incentives to cut costs, which could lead them to neglect negative externalities. However, we find that cost cutting incentives could in fact be environmentally friendly. To arrive at this conclusion, we use a quasi-natural experiment of the restructuring of the utility industry in the US, which has opened the market to competition. We find that the restructuring has incentivized utilities to move to cheaper, but also less polluting, fossil fuels. Moreover, competition forces have smoothed out inefficient peak-capacity operation across competing plants, also contributing to reduction in pollution.
Keywords: Product Market Competition, Environment,ESG
JEL Classification: G30, D22, Q52, Q53
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