The Impact of Institutional Factors on Environmental Efficiency: A Bayesian Data Envelopment Analysis

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This study employs an innovative Bayesian data envelopment analysis (DEA) methodology to estimate cross-country environmental efficiency and explores its relationship with formal institutional factors, focusing on control of corruption and government effectiveness.

The Bayesian DEA approach utilized in this research is demonstrated to provide robust estimates, surpassing other prevalent bias-correction DEA techniques in terms of lower mean square error and mean absolute error. The regression analysis integrates a two-step generalized method of moments (GMM) for linear dynamic panel data.

Drawing on a balanced panel of 144 countries spanning the period from 2002 to 2019 and categorized into developed and developing, this study extends the examination of institutional factors to environmental efficiency. Contrary to developed countries, the research identifies a statistically significant and marginally negative relationship between control of corruption and environmental efficiency in developing nations, aligning with the “grease the wheel” theory sourced in economic growth literature.

The findings contribute to the evolving discourse on environmental efficiency, emphasizing the nuanced impact of institutional factors. Importantly, the study underscores the significance of lagged environmental efficiencies, revealing a robust and statistically significant effect on current environmental performance.

This highlights the imperative for countries to steadfastly commit to regulating energy consumption and mitigating CO2 emissions. Overall, the study not only advances methodological understanding through the innovative Bayesian DEA approach but also provides substantive insights into the interplay between institutional factors and environmental efficiency, shaping the discourse on sustainable development.

Introduction: In recent years, the impact of institutional factors on economic performance has gained significant attention in economic literature (North, 1990; Efendic et al., 2011). This study extends this focus to the realm of environmental efficiency, acknowledging the crucial role of institutions in shaping economic and environmental outcomes. The research addresses the growing concern of climate change and the imperative to reduce greenhouse gas emissions, emphasizing the need to balance economic development with environmental sustainability.

Literature Review: The literature review establishes the foundation for the study, highlighting the undeniable influence of institutions on economic performance (North, 1990; Ahmad and Hall, 2017). Recognizing the global threat posed by climate change, scholars and policymakers have increasingly emphasized the importance of institutional quality in addressing environmental challenges (Salman et al., 2019). The study references key works such as the Kyoto Agreement (Böhringer and Vogt, 2003) and underscores the ongoing struggle to achieve substantial reductions in CO2 emissions despite global efforts (Acheampong et al., 2021).

Challenges in Mitigating GHG Emissions: The study delves into the complex challenges faced by countries in reducing greenhouse gas (GHG) emissions while safeguarding economic benefits. Disparities in countries’ priorities, capacities, and socio-economic conditions contribute to difficulties in reaching climate change mitigation goals (Paavola, 2006; Nordhaus, 2015). The research emphasizes the spillover effects of emission control measures, particularly by developed nations, on the global economy (Babiker et al., 2000).

The Role of Domestic Institutional Quality: To address conflicts of interest in mitigating GHG emissions, scholars propose enhancing domestic institutional quality to improve environmental performance (Tateishi et al., 2020; Acheampong et al., 2021). The study argues that effective institutions play a crucial role in the success of economic, energy, and environmental policies. This aligns with the call for institutional settings to facilitate international cooperation in climate protection (Böhringer and Vogt, 2003). Panayotou (1997) contends that institutional quality significantly enhances a country’s environmental quality, irrespective of its economic level.

Institutional Controls and Environmental Performance: The research elucidates how institutions utilize contextual controls to establish and regulate public laws and regulations (Acemoglu and Robinson, 2008a). Institutional quality, encompassing formal and informal rules, is intricately linked to the legal and cultural framework influencing socioeconomic activities (Salman et al., 2019). The study emphasizes the role of institutions in lowering transaction costs associated with economic and environmental performance (Tateishi et al., 2020).

Methodology: Bayesian GDDF DEA Approach: This study introduces a two-stage methodology, employing a Bayesian GDDF DEA model to estimate environmental efficiency. The GDDF DEA model is chosen for its suitability in handling undesirable variables, while the Bayesian extension reduces estimation biases. The research addresses the upward bias in DEA estimates due to finite samples and measurement errors, drawing on insights from Grosskopf (1996), Simar (2007), and Al Tamimi et al. (2022). The novel Bayesian approach, as inspired by Zervopoulos et al. (2022), enhances efficiency estimates and facilitates the use of the two-step generalized method of moments (GMM) in the second-stage analysis.

Contributions of the Study: The research claims novelty in elaborating on the impact of institutional factors on environmental efficiency using a Bayesian DEA approach for bias correction. The study contributes to methodological advancements by smoothing out the multimodal distribution of DEA efficiencies. Notably, the analysis investigates the relationships among various formal institutions and their interaction effects with country classification on environmental efficiency.

Empirical Results: Section 5 of the study presents and discusses the empirical results obtained from the Bayesian GDDF DEA model. Notably, the study identifies an inverse relationship between control of corruption and environmental efficiency in developing countries. This effect is statistically significant but marginal and not observed in developed countries. Additionally, the study finds that developed countries’ environmental efficiency is influenced by lagged environmental performance rather than formal institutional factors.

Conclusion: The study concludes by summarizing the key findings and their implications. It reflects on the significance of institutional factors in shaping environmental efficiency, offering insights into the complex interplay between institutions, economic development, and environmental sustainability. The research emphasizes the need for robust institutional frameworks to address the global challenge of climate change and encourages further exploration of these dynamics in future studies.

In conclusion, this detailed article provides a comprehensive overview of the study’s objectives, methodology, and findings, offering a valuable contribution to the literature on the relationship between institutional factors and environmental efficiency.


reference link: https://www.sciencedirect.com/science/article/abs/pii/S0959652623005590?via%3Dihub

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