Regulatory Externalities as a Driver of Corporate Environmental Performance

We hypothesize that regulatory externalities (i.e., regulations in jurisdictions beyond where a firm operates) can influence a firm’s environmental behavior. Specifically, we predict that firms will be sensitive to regulations both in neighboring jurisdictions and in jurisdictions where peer firms operate. By examining the use of renewable-generating technologies in the U.S. electrical utility sector between 2001 and 2006, we find evidence of regulatory externalities while controlling for firm capabilities and regulations within the jurisdictions where a firm operates. Firms adopt more renewable power generation when their peers face greater renewable power standards elsewhere. Thus, in the electrical utility sector, we find that regulatory externalities spur a race to the top.