Works Councils and Environmental Investment: Theory and Evidence from German Panel Data

Firms may underinvest in local environmental protection even from the private viewpoint of its owners and employees, but works councils may help mitigate this problem. We show that increases in environmental investments when councils are present could be employee-led, firm-led, or jointly-led. We test these alternatives with German panel data using a random effects probit model, and find a strong and robust relationship between investments in improving local environmental quality and council activities. This effect is largest and most significant when the council is active in environmental matters, and when management views employee participation as productive. With the exception of product innovation, we generally do not find analogous effects on investments that reduce environmental impacts more remote from the workplace, or for other types of investment. We conclude that the higher environmental investments in establishments with councils are largely employee-led or jointly-led; but the significant effect of management attitudes toward participation suggests that genuine management-employee cooperation and the tradeoffs it implies is taking place.