Firm ownership and pollution

We provide a theoretical micro foundation for how much pollution (negative externalities) a firm will internalize based on the ownership distribution of its shareholders. Small shareholders, compared to large ones, want the firm to spend more on avoiding pollution since they suffer less profit loss for the same environmental benefit. In particular, if a shareholder holds a share of 1 / N , where N is the population in society, that shareholder’s preferences align with a social planner’s. Three theoretical predictions arise. First, small shareholders will systematically vote for a greener corporate profile. Second, firms with a smaller weighted-median shareholder will pollute less. Third, countries with concentrated corporate wealth holdings and/or more individualized firm ownership will pollute more. This implies that standard models of externalities in environmental economics and macroeconomics containing representative agents are either internally inconsistent or not fully specified.