Standardized Environmental Management Systems as an Internal Management Tool

Abstract

We build a principal-agent model to analyze the firm's decision to adopt an environmental management system (EMS) and the EMS type, either informal (I) or standardized (S), such as ISO 14001. Our results are consistent with empirical evidence in several respects. A standardized EMS increases the internal control of the firm at the cost of introducing some degree of rigidity that entails an endogenous setup cost. Standardized systems are more prone to be adopted by big and well established firms and under tougher environmental policies. S-adopting firms, on average, devote more effort to abatement although this effort results in lower pollution only if public incentives are strong enough, suggesting a complementarity relationship between standardized EMS and public policies. Emission charges have both a marginal effect on abatement and a qualitative effect on the firm's adoption decision that may induce a conflict between firm's and society's interests. The introduction of standardized systems can result in win-win situations where firms, society and the environment get better off.