There is No Planet B: Stakeholder Governance That Aligns Incentives to Preserve the Amazon Rainforest

Abstract: How do firms design incentives compatible with environmental protection? The new institutional economics identifies the challenges of governing common-pool resources and the difficulties of internalizing environmental externalities into regular market transactions. New stakeholder management theory suggests that firms may avoid the tragedy of the commons through the formation of a polycentric governance structure among stakeholders. This paper evaluates these theoretical claims by analyzing the activities of Natura, a Brazilian cosmetics company, regarding Amazon rainforest preservation. We argue that Natura internalizes positive externalities arising from environmental protection by sharing value with stakeholders in rural Amazon communities. To test this proposition, the paper presents a differences-in-differences analysis comparing forest preservation in the municipalities that Natura entered versus those in which it did not. The study employs an instrumental variable based on missing satellite images, which Natura relies upon to make decisions about entry into different municipalities. Quantitative results show that Natura’s entry into a municipality helps to preserve forested areas. Analysis of three mechanisms using information on crop yields ties Natura’s involvement with stakeholder decisions to cultivate forest-generated crops rather than to engage in clear-cutting. This study evidences how firms can foster environmental protection through Coasean mechanisms.