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Can capital markets create incentives for pollution control?


  • Lanoie, Paul
  • Laplante, Benoit
  • Roy, Maite


After weighing the costs and benefits of pollution control, profit-maximizing firms sometimes choose not to invest in pollution abatement because the penalty they expect regulators to impose for noncompliance falls short of the cost of abatement. To improve incentives for pollution control, regulators have recently embarked on a strategy to release information to communities and markets (investors and consumers) about firms'environmental performance. Drawing on evidence from American and Canadian studies, the authors report that capital markets do react to the release of such information. The evidence suggests that heavy polluters are affected more significantly than minor polluters. And firms whose market values are hurt most by the release of this information are most likely to invest in pollution abatement. The firms'greater willingness to invest in pollution abatement seems to result from the regulators'willingness to undertake strong enforcement actions combined with the possibility of capital markets reacting to public ranking of firms in terms of their environmental performance.

Suggested Citation

  • Lanoie, Paul & Laplante, Benoit & Roy, Maite, 1997. "Can capital markets create incentives for pollution control?," Policy Research Working Paper Series 1753, The World Bank.
  • Handle: RePEc:wbk:wbrwps:1753

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    References listed on IDEAS

    1. Alderman, Harold & Canagarajah, Sudharshan & Younger, Stephen, 1995. "A Comparison of Ghanaian Civil Servants' Earnings before and after Retrenchment," Journal of African Economies, Centre for the Study of African Economies (CSAE), vol. 4(2), pages 259-288, October.
    2. Grootaert, Christiaan & Kanbur, Ravi, 1995. "Child labor : a review," Policy Research Working Paper Series 1454, The World Bank.
    3. Psacharopoulos, George & Velez, Eduardo & Patrinos, Harry Anthony, 1994. "Education and earnings in Paraguay," Economics of Education Review, Elsevier, vol. 13(4), pages 321-327.
    4. Horton, Susan & Kanbur, Ravi & Mazumdar, Dipak, 1991. "Labor markets in an era of adjustment : an overview," Policy Research Working Paper Series 694, The World Bank.
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    Cited by:

    1. Khanna, Madhu & Quimio, Wilma Rose H. & Bojilova, Dora, 1998. "Toxics Release Information: A Policy Tool for Environmental Protection," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 243-266, November.
    2. Dasgupta, Susmita & Hettige, Hemamala & Wheeler, David, 2000. "What Improves Environmental Compliance? Evidence from Mexican Industry," Journal of Environmental Economics and Management, Elsevier, vol. 39(1), pages 39-66, January.
    3. Iulie Aslaksen & Terje Synnestvedt, 2003. "Corporate environmental protection under uncertainty," Discussion Papers 355, Statistics Norway, Research Department.
    4. Dasgupta, Susmita, 1999. "Opportunities for improving environmental compliance in Mexico," Policy Research Working Paper Series 2245, The World Bank.
    5. Caplan, Arthur J., 2003. "Reputation and the control of pollution," Ecological Economics, Elsevier, vol. 47(2-3), pages 197-212, December.
    6. Wheeler, David, 2001. "Racing to the bottom : foreign investment and air pollution in developing countries," Policy Research Working Paper Series 2524, The World Bank.
    7. Amarnath Ananthanarayanan, 1998. "Is There A Green Link A Panel Data Value Event Study Of The Relationship Between Capital Markets And Toxic Releases," Departmental Working Papers 199818, Rutgers University, Department of Economics.
    8. Dasgupta, Susmita & Laplante, Benoit & Mamingi, Nlandu, 1998. "Capital markets responses to environmental performance in developing countries," Policy Research Working Paper Series 1909, The World Bank.


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