Institutions for Removing Information Asymmetries in the Market for Corporate Environmental PerformanceEPA Grant Number: R831733
Title: Institutions for Removing Information Asymmetries in the Market for Corporate Environmental Performance
Investigators: Terlaak, Ann
Institution: University of Wisconsin Madison
EPA Project Officer: Michaud, Jayne
Project Period: October 1, 2004 through September 30, 2007 (Extended to September 30, 2008)
Project Amount: $76,083
RFA: Corporate Environmental Behavior and the Effectiveness of Government Interventions (2004) RFA Text | Recipients Lists
Research Category: Economics and Decision Sciences
This project assesses the conditions under which certification of environmental management practices removes information asymmetries between firms and stakeholders by credibly signaling about superior environmental performance. To the extent that stakeholders reward superior environmental performance, their ability to differentiate high performers from low performing ones can provide an incentive for firms to improve their environmental performance.
Three issues that may limit the ability of certification schemes to signal about superior environmental performance will be explored. The first hypothesis is that the relationship between what is being certified (environmental management practices) and what certification is expected to communicate about (level of environmental performance) will not always be positive. Instead, industry, firm, and temporal effects may distort this relationship such that certified practices can be linked to inferior environmental performance. Second, under some conditions, the practices that are being certified shape the very attribute that certification signals about. Thus, environmental performance may be endogenous, thereby limiting the ability of certification to communicate about cross firm performance differences. Third, varying signaling equilibriums will occur, such that in some industries, only average performers certify. Understanding these issues is critical for the ability of policymakers and stakeholders to draw correct inference from certification of environmental management practices.
Certification with the ISO 14001 environmental management standard will be used to assess whether certification of management practices removes information asymmetries in the market for corporate environmental performance. A 13-year panel dataset will be assembled by combining secondary data on U.S. manufacturing facilities from various sources.
For policymakers, removing information asymmetries may be a cost-effective way to restore market mechanisms that provide incentives for superior environmental performance. It is not clear whether certification schemes can play a role in this endeavor and which role they should play. This project will shed light on this issue by identifying conditions that reduce the ability of certification schemes to signal about superior environmental performance. Expected results will inform policymakers how to incorporate more effectively certified management standards in environmental policy.