Intergenerational Fairness and the Crowding Out Effects of Well‐Intended Environmental Policies

• Published date: 01 July 2016
• Author: Richard A. Hunt,Bret R. Fund
• DOI: http://doi.org/10.1111/joms.12202
• Date: 01 July 2016

Intergenerational Fairness and the Crowding Out

Effects of Well-Intended Environmental Policies

Richard A. Hunt and Bret R. Fund

Virginia Polytechnic Institute; University of Colorado

ABSTRACT Sustainability involves the drive to ensure intergenerational fairness. However, the

results of actions taken to achieve sustainability often lie far into the future and efforts to

promote the welfare of distant generations may or may not ultimately be successful. While

both governmental policies and entrepreneurial innovation have been cited as being

indispensable to the achievement of sustainability, the manner in which they co-exist and

interact over very long periods of time remains unclear. Using a computational model

spanning more than two centuries, this study asks: Do well-intended environmental policies

facilitate or inhibit environmental entrepreneurship? By simultaneously considering both the

ethical and economic consequences of efforts to arrest environmental degradation, our study

answers the call to develop multi-disciplinary perspectives and integrative frameworks when

addressing the challenges of sustainable existence. Contrary to widely held perceptions, our

findings suggest that policy actions may, in the long run, result in less intergenerational

fairness by crowding out environmentally desirable innovations and organizations. Our

examination of the long-term interactions between policies and markets offers insights and

opportunities for scholars, entrepreneurs, environmentalists, ethicists and policymakers to

develop solutions that preserve and extend the essential contributions of both policy actions

and entrepreneurial innovations.

Keywords: crowding out, environmental entrepreneurship, intergenerational fairness,

sustainability

INTRODUCTION

The ethical underpinnings of sustainability hinge on the concept of intergenerational

fairness (Pezzey and Toman, 2002, 2005; Weiss, 1990; Woodward, 2000); meaning that

each successive generation harvests renewable resources, depletes non-renewable

resources, and generates waste in a fashion that can continue indefinitely (Daly, 1990).

Address for reprints: Richard A. Hunt, Virginia Polytechnic Institute, Pamplin College of Business,

Blacksburg, VA 24061, USA (rickhunt@vt.edu).

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C2016 John Wiley & Sons Ltd and Society for the Advancement of Management Studies

Journal of Management Studies 53:5 July 2016

doi: 10.1111/joms.12202

Given the complexity of the sustainability challenge, arguments have been advanced

that a meaningful approach must include aggressive activation of public policy (e.g.,

Porter, 1991) and resolute enforcement by institutions through international coordina-

tion (e.g., Pezzey and Toman, 2005). Scholars have also convincingly asserted that inno-

vating entrepreneurs play a vital role through the agile pursuit of novel solution sets,

facilitated through an open arena of competing technologies and business models

(Anderson and Leal, 2001; Baumol and Oates, 1988). What is less certain, and what has

not been fully assessed, is the manner in which environmental policies and environmen-

tal entrepreneurship either coalesce or collide in the marketplace (Dean and McMullen,

2007; Hall, et al. 2010). While calls for transnational (Haas et al., 1993; Susskind and

Ali, 2014) and transgenerational (Padilla, 2002; Weiss, 1990) polices have continued to

gain momentum, the impact of policy on entrepreneurial action remains largely indeter-

minate (Anderson and Leal, 2001). If such policies unwittingly reduce the development

and commercialization of impactful entrepreneurial innovations (Anderson and Hug-

gins, 2008), then future generations may actually be worse off.

The purpose of this paper is to assess the extent to which well-intended environmental

policies facilitate or inhibit environmentally desirable entrepreneurship. Our contribu-

tions are fourfold. First, we develop and test the first expansive model that is able to pre-

dict how and why environmental policies impact environmental entrepreneurship.

While existing literature, primarily emanating from environmental economics (Jennings

and Zandbergen, 1995; Newell et al., 1999; Popp, 2010) and corporate social responsi-

bility (e.g., Bansal and Roth, 2000; Hoffman, 1999; Shrivastava, 1995) has related pub-

lic policy to corporate behaviours by incumbent firms, there are no predictive

frameworks regarding environmental policies that fundamentally change the incentive

structures (Baumol, 1993) and property rights (Anderson and McChesney, 2003; Brom-

ley, 1991) impacting new generations of innovating entrepreneurs.

Second, our conceptual framework contributes much-needed multi-disciplinary sub-

stance to the study of intergenerational fairness. Our approach reconciles and integrates

prior efforts to address sustainable existence from solely an ethical or economic perspec-

tive by adapting economics-based perspectives on environmental degradation (Jaffe and

Palmer, 1997; Newell et al., 1999; Popp, 2006, 2010) and crowding out (Ahmed, 1986;

Aschauer, 1985; Barro, 1987) to innovation management-based theories on path

dependency (Arthur, 2007; Dosi, 1982; Teece, 1986), and business ethics-based perspec-

tives on intergenerational fairness (Padilla, 2002; Pezzey and Toman, 2002, 2005;

Weiss, 1990; Woodward, 2000).

Third, we contribute to the range and sophistication of methodologies that scholars

can employ when assessing the consequences of complex interactions that occur well

into the future, such as those that characterize sustainability. Using a mathematical sim-

ulation, we are able to account simultaneously for the intergenerational effects of both

policy-based and market-based efforts to arrest environmental degradation. Although

computational modelling has witnessed extensive use in other fields (Hartmann, 2009),

it is less common in management research (Harrison et al., 2007). The viability of using

our model to integrate sustainability, ethics and entrepreneurship underscores and vali-

dates its importance as a complement to more mainstream tools, by providing an

879Crowding Out Effects of Environmental Policies

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intermediation of research that is purely theoretical or empirical (Markman et al.,

2015), especially across very long timeframes.

Finally, we inject the critical dimension of time into the study of sustainability, ethics

and entrepreneurship. By focusing on far longer timeframes than prior research, our

approach invites a fuller assessment of the time-varying interactions between public pol-

icy and environmental entrepreneurship. Through this, we offer a clearer picture of the

trade-offs that accompany public and private efforts to address the intergenerational

impacts of resource depletion and environmental degradation.

In the following section, we discuss important ways in which the scholarship on entrepre-

neurial action can be more aptly reconciled with the literatures on sustainability and the

ethics of intergenerational fairness. We then develop a new framework and derive four prop-

ositions that are explored using a computational model. We conclude with a discussion of

implications from our study for policymakers, scholars and environmental entrepreneurs.

THEORETICAL DEVELOPMENT

Central to the aims of both well-intended environmental policy and environmental

entrepreneurship is the recognition that sustainability involves taking steps to address

‘intergenerational fairness’ in the actions society takes regarding finite resources and the

quality of life available to future generations (Padilla, 2002; Pezzey and Toman, 2002,

2005; Weiss, 1990; Woodward, 2000). Policies aim to affect change through institutional

sanctions and supports, actions that typically take the form of subsidies for desirable but

uneconomical goods and services, or taxes imposed upon practices and technologies

that are environmentally undesirable. Environmental entrepreneurship – which is

defined by Dean and McMullen (2007, p. 58) as ‘the process of discovering, evaluating,

and exploiting economic opportunities that are present in environmentally relevant

market failures’ – aims to develop and implement technological, organizational and

financial innovations as market-based responses to the mispricing of intergenerational

impacts. Far from being mutually exclusive, government policy and entrepreneurship

not only coexist (Lenox and York, 2011), but also significantly influence one another’s

ability to address intergenerational fairness (Dean and McMullen, 2007).

Developing and commercializing novel technologies (Popp, 2010) and business mod-

els (Zott et al., 2011) through entrepreneurial action is complex and fluid. In the context

of policy-driven commitments to specific technological and organizational paradigms, a

complex mixture of cooperation and competition emerges involving, on the one hand,

the fluid conditions characterizing entrepreneurial innovation and rent-seeking; and, on

the other hand, the aims of governmental policy measures that are intended to arrest

environmental degradation (Popp, 2010). Our investigation focuses on two effects that

are central to the shared fate of sustainability, entrepreneurship and intergenerational

fairness: crowding out and path dependency.

Crowding Out Effects

The study of crowding out effects originated in macroeconomics and refers to the phe-

nomenon in which the market participation of one party reduces or eliminates the

880 R. A. Hunt and B. R. Fund

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