Differentiation in Adoption of Environmental Standards: LEED

Understanding how firms adopt voluntary quality or environmental standards is important for designing such programs and evaluating their success. We study the adoption of LEED (Leadership in Energy & Environmental Design), an internationally recognized environmental building certification system. LEED offers four levels of certification, corresponding to greater investments in green building technology. We find substantial heterogeneity in the choice of certification levels, even within relatively small markets. In order to explain this heterogeneity, we specify a model that encompasses market and building factors, as well as differentiation – choosing LEED levels that distinguish a building from its rivals. We estimate this model via indirect inference, and find that differentiation accounts for 34.1% of the variation due to observable variables. It is more important than observed project characteristics, almost as important as observed market characteristics, and 16.07% as important as unobserved market effects. We also use the model to evaluate a counterfactual LEED standard that provides only two certification levels, reducing opportunities for differentiation. Our model predicts that certification levels would increase under the counterfactual standard, though this need not produce improved environmental performance.