Environmental Regulation and Firm Efficiency

Abstract: This study is entitled Environmental Regulation and Firm Efficiency. It provides an empirical analysis of how environmental policy may have affected the Swedish pulp industry. The main purpose is to test the Porter hypothesis concerning the impacts of environmental regulation on producer efficiency. To do that, a 2-stage method is adopted, which fundamentally is based on Shepards´s multi-output distance function. In fulfilling the purpose, three main issues are discussed. First, different types of deterministic and stochastic approaches are described and empirically compared. Theoretically, this is mainly about how producer inefficiency is defined. Empirically, it reveals that the results should be viewed as tentative, largely because of the difficulties associated with calculations or estimation techniques. Second, a simplified environmental regulatory index, suitable when the firm technology is characterized by an output distance function, is promoted. Finally, shadow prices of bad outputs are considered i order to investigate the extent to which pulp plants are restrainde by environmental restrictions.