When Good Managers Face Bad Incentives : Management Quality and Energy Intensity in the Presence of Price Distortions

We use unique firm-level data on management practices and energy expenditures in about 2,000 manufacturing firms in central and eastern Europe, Central Asia and Middle East and North Africa to examine how the quality of management practices relates to the energy intensity of firms in the presence of fossil fuel subsidies. We find that better managed firms respond to the incentives and increase their energy intensity if the difference between the supply cost and the consumer price of energy is relatively large. This is particularly relevant for firms in high energy-intensive sectors. However, in the presence of environmental costs in the form of global warming and local pollution all types of firms tend to reduce their energy intensity. Findings suggest that the combined effect of these two forces is not statistically distinguishable from zero for the manufacturing sector overall. In high energy-intensive sectors, the polluting effect of fossil fuel subsidies prevails