Does Learning from Inspections Affect Environmental Performance? Evidence from Unconventional Well Development in Pennsylvania

Abstract

Problem definition: We investigate whether firms improve their environmental performance by learning from their own inspection experience and from the inspection experience of other firms. Additionally, we examine how the various facets of inspection experience affect organizational learning. Academic/practical relevance: With the growing awareness that operations can affect the environment, regulators increasingly use facility inspections to assess whether a firm’s operations comply with or violate environmental regulations. A large body of work has explored the role of inspections in detecting violations. But, what remains relatively under studied is that firms can also learn from inspections about regulatory requirements and environmental issues. Thus, firms can develop organizational knowledge essential for improving environmental performance as they gain inspection experience. We aim to extend extant knowledge by exploring how environmental inspections can facilitate organizational learning. Methodology: We use econometric methods to analyze data from the development and inspection of unconventional wells in Pennsylvania. Our data has information on 13,606 unconventional wells that were developed in Pennsylvania from 2004 to 2014. In this time frame, 55,278 environmental inspections were conducted at these unconventional wells. Results: We find that an unconventional well learns from the inspection experience of other units, both within the organization and outside the organization, only when inspections detect violations but not when they confirm compliance. Furthermore, penalties imposed for violations have a divergent effect—they support learning from the inspection experience with violations when such experience is gained at other units within the organization but not when it is gained at units outside the organization. Thus, we provide insights on how the outcomes of environmental inspections and penalties facilitate the development of organizational knowledge. Managerial implications: Our results provide pointers to regulators and operating managers on how information from inspection outcomes can be leveraged to improve environmental performance. The online appendix is available at https://doi.org/10.1287/msom.2017.0695 .