Does Learning from Inspections Affect Environmental Performance? - Evidence from Unconventional Well Development in Pennsylvania

Abstract

With the growing awareness that operations can affect the environment, regulators increasingly use facility inspections to assess a firm’s environmental performance: whether its operations comply with or violate environmental regulations. When operations violate regulations, firms can face regulatory sanctions for non-compliance and pressure from stakeholders to improve environmental performance. Consequently, firms need to develop organizational knowledge to ensure that their operations conform to regulations. Learning from past inspection experience is critical for the development of such knowledge. Using data on 13,606 unconventional wells developed in Pennsylvania from 2004 to 2014, we investigate how firms can learn from their inspection experience and from such experience of other firms. We find that an unconventional well learns from the inspection experience of other units both within the organization and outside the organization, only when inspections detect violations but not when they confirm compliance. Further, penalties imposed for violations have a divergent effect ­­– they support learning from the inspection experience with violations when it is gained at other units within the organization, but not from such experience gained at units outside the organization. Our results provide insights on how the outcomes of environmental inspections and penalties facilitate the development of organizational knowledge.