Dumpster Diving for Environmental Standards: The Economics of "Race to the Bottom"

Debates about environmental standards often revolve around the issue of jobs. A central argument for less protective standards is the “race to the bottom” concept.

This idea is that businesses will invest in the least protective countries, states and cities, because it’s cheaper. This can incite a competitive race among governments to have the least protective standards. The troubling extension of this logic is that more protective standards come at the expense of jobs and economic growth, pitting health and the environment against jobs.

If businesses really do “dumpster dive” to find the least protective environmental standards, then there must be serious trade-offs. We’ve spent some time tracking down research on this question in order to understand these costs.

There has been a lot of serious research testing the “race to the bottom” hypothesis. The results have been largely inconclusive. That has led social scientists to explore innovative analyses to figure out what is actually going on.

Peter Madsen, a professor of organizational behavior at BYU, has done research which suggests that firms with high internal environmental standards seek to do business in countries with similar standards. In other words, what we have is not so much a race to the bottom but more of a dating game with companies and governments seeking compatible partners whose standards and practices match their own. This could explain why the “race-to-the-bottom” research was inconclusive: While some firms were racing to the bottom, others were not, so there was no cohesive trend. More importantly for policy makers, the lesson is that government doesn’t have to trade health for jobs, and can instead create a culture that attracts businesses that meet the needs of their people.

Madsen also discovered an important wrinkle. He finds that companies with existing high internal environmental standards prosper when government regulations become more protective of human health. This suggests a powerful pro-business pro-health opportunity. We can have health and jobs, if we have well designed regulatory policies.

Clean companies stand to gain from more protective standards, and clean states stand to gain clean businesses!
 

Links to download the papers below:

Environmental Regulation as a Link Between Corporate Environmental and Financial Performance.

Does Corporate Investment Drive a "Race to The Bottom" in Environmental Protection? A Reexamination of the Effect of Environmental Regulation on Investment.