Impact of bad outputs and environmental regulation on efficiency of Indian leather firms: a directional distance function approach

This paper measures the environmental efficiency of the grossly polluting Indian leather industry which faces stringent environmental regulations. The environmental efficiency measure accounts for associated bad outputs (total suspended solids and chromium) with the good output (leather products) of firms and hence, provides an important benchmark for improving environmental performance. Drawing data from fieldwork in the Kanpur industry of India, the study estimates efficiency using the directional distance function approach under three directional vectors. The results reveal that the efficiency of firms is underestimated when bad outputs are omitted in the production technology. There is significant potential to increase leather production and reduce pollutants across firms. The study confirms that regulation improves the environmental efficiency of leather firms. However, regulation imposes an opportunity cost on firms of an average 3% loss in expanding leather output and reducing inputs. The study recommends mandating the use of cleaner technology and market-based instruments to improve environmental efficiency.

Automated summary

This study measures the environmental efficiency of the Indian leather industry and finds potential for increasing leather production and reducing pollution. It confirms that regulations can improve environmental efficiency of firms, but also impose opportunity costs on firms. The study suggests using cleaner technology and market-based instruments to enhance environmental efficiency.