The Effect of Professional Social Norms on Corporate Environmental Compliance

Abstract

While previous studies demonstrate the importance of social norms for explaining the pro-environmental behavior of individual consumers, very few studies examine the role of social norms in the context of businesses’ pro-environmental decisions. This study contributes to the rich social norm literature by exploring whether professional social norms influence the compliance decisions of regulated chemical manufacturing facilities. To this end, the empirical analysis uses data on major facilities regulated under the U.S. Clean Water Act to estimate the link from the compliance history of other major chemical manufacturing facilities operating in the same state to an individual facility’s current compliance decision. Using a fixed-effects model that includes a large set of confounding factors, we find a significant positive effect of other facilities’ compliance history: improvement in the average compliance history prompts the individual facility to increase its own performance. By controlling for other plausible channels that link facility’s compliance decisions, we interpret this relationship as reflecting descriptive professional norms. The relationship proves stronger for facilities that are either geographically or sectorally closer.