Is #Pollution Value Maximizing ?
Quand polluer « maximise les #profits », une entreprise décide de continuer à polluer en pleine connaissance de cause, même si l’affaire reste toujours rentable après avoir investi dans des appareils de dépollution...
In February 2017, #DuPont settled a C8-related litigation for $670M. Thus, it may seem that the system works and legal liability should deter firms from polluting. However, by using evidence discovered during the C8-litigation we show that it was perfectly rational for DuPont to pollute ex ante, in spite of the costs it ended up paying ex post, and the costs it imposed on society.
The key decision point for DuPont came in 1984 , when alarming information about the potential consequences of C8 emissions caused the company to call a top-executives meeting. By 1984 DuPont was aware that C8 is toxic, associated with birth defects, does not break down in the environment, and accumulates in human blood over time. Essentially, by 1984 C8 could already be considered a perennial red flag. DuPont’s executives acknowledged that the legal and medical departments would recommend stopping the usage of C8 altogether in light of the new alarming information. Yet, the business side overruled these recommendations and opted to continue C8 emissions (in fact they doubled them). Importantly, DuPont’s decision-makers also opted against investing in abatement options that were on the table , such as building an incineration device that would greatly reduce C8 emissions.
Was this a myopic managerial decision? An agency problem? The internal documents allow us to conduct a cost-benefit analysis, showing that even a shareholder-value-maximizing manager would have chosen to pollute. Our calculation shows that even if DuPont managers could have forecasted all future legal liabilities, they would have preferred to pollute as long as they thought that the probability of getting caught was less than 19%. Given the extreme set of unlikely events that led to the payment of heavy legal fines, and given the fact that other C8 users (like 3M) have escaped such heavy legal liability, we conclude that at that time polluting without abating was a reasonable bet by DuPont’s decision makers. Thus, it was value-maximizing for DuPont to pollute, in spite of the fact that—as we show—the costs C8 pollution imposed on society greatly exceeded DuPont’s own estimates of abatement costs.
Via naked capitalism, qui critiquent les remèdes proposés par les auteurs de l’étude :
Quelle Surprise ! Pollution Pays ! | naked capitalism
Given the large power imbalance when companies misbehave, Shapira’s and Zingales’ remedies are insufficient. They incorrectly frame the problem as in informational, as opposed to about incentives.
They call for bounties for whistleblowers plus a large tax on gag settlements in environmental cases. But it is hardly a secret, save maybe in academia, that whistleblowers ruin their careers and often their marriages, and pay a big psychological price, when the financial payoff is far from certain. Economists of the caliber of Shapira and Zingales should know that people are risk averse, and for good reason: there’s no reason to think you have more than one life. Why throw it away on a fight, even a righteous fight, which parties with much deeper pockets and staying power than you have who will do everything they can to pound you into the ground?
Similarly, the idea of a tax on gag settlements is just silly. The incremental cost of the tax will be too small to change behavior. Shapira’s and Zingales’ objective is to more disclosure, which would help regulators and parties considering litigation, when the companies will just pay the tax.
The obvious solution is to make executives accountable, by at a minimum forcing the payment of any large fines to come out of deferred comp and to require executives above a certain level to have a significant portion of their compensation be deferred. Only by hitting the executives where it hurts, in their wallets, and to enough of a degree to affect their standard of living, do you start to have a chance of changing behavior.