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Differentiation Strategies in the Adoption of Environmental Standards: LEED from 2000 to 2014

Author

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  • Marc Rysman

    (Department of Economics, Boston University, Boston, Massachusetts 02215)

  • Timothy Simcoe

    (Questrom School of Business, Boston University, Boston, Massachusetts 02215; National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Yanfei Wang

    (Business School, Renmin University of China, Beijing 100872, China)

Abstract

We study the role of vertical differentiation in the adoption of LEED (Leadership in Energy & Environmental Design), a multitier environmental building certification system. Our identification strategy relies on the timing of adoption and shows that builders seek to differentiate from each other by choosing a different certification level from previously certified buildings. A common concern in this framework is that mean-reverting behavior could be mistaken for differentiation. We develop a new method for establishing the importance of strategic interactions based on simulating from a model with independent choice and unobserved heterogeneity, and showing that such a model cannot generate the level of interaction that we observe. Finally, we estimate a model that incorporates both differentiation incentives and correlated market-level unobservables and use our estimates from this model to simulate the impact of reducing the number of LEED tiers from four to two. The simulations indicate that environmental investments depend on the location of the threshold between tiers.

Suggested Citation

  • Marc Rysman & Timothy Simcoe & Yanfei Wang, 2020. "Differentiation Strategies in the Adoption of Environmental Standards: LEED from 2000 to 2014," Management Science, INFORMS, vol. 66(9), pages 4173-4192, September.
    • Handle: RePEc:inm:ormnsc:v:66:y:2020:i:9:p:4173-4192
    DOI: 10.287/mnsc.2019.3399
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