When good managers face bad incentives: Management quality and fuel intensity in the presence of price distortions

Abstract

We use unique firm-level data on management practices and fuel expenditures in about 2000 manufacturing firms in central and eastern Europe, Central Asia, and Middle East and North Africa to examine how the quality of management practices relates to the fuel intensity of firms in the presence of fossil fuel subsidies. We use country- and country-sector-level measures of fossil fuel subsidies and distinguish between those that include externalities and those that do not. We find that better managed firms respond to the incentives and increase their fuel intensity if the difference between the supply cost and the consumer price of fuel is relatively large. This is particularly relevant for firms in high energy-intensive sectors. However, in the presence of environmental costs in the form of global warming and local pollution all types of firms tend to reduce their fuel intensity. Findings suggest that the combined effect of these two forces is not statistically distinguishable from zero overall. In high energy-intensive sectors, the polluting effect of fossil fuel subsidies prevails.