The Role of Institutional Factors in Shaping Environmental Performance: Evidence from Developed and Developing Countries

The present study employs a novel Bayesian data envelopment analysis (DEA) approach to investigate the impact of institutional factors on the relative environmental performance of developed and developing countries. This study establishes a relationship between formal institutional factors (e.g., government effectiveness and corruption control) and environmental performance. The Bayesian DEA method employed here provides valid estimates, outperforming other existing bias-correction DEA techniques in terms of lower mean square error and mean absolute error. The efficiency estimates are incorporated in a two-step generalized method of moments (GMM) for linear dynamic panel data applied to a balanced panel encompassing 144 countries spanning from 2002 to 2019. Consistent with prior research on economic growth and environmental efficiency, this study reveals an inverse relationship between corruption control and environmental performance in developing countries. This relationship is statistically significant but marginal. Unlike developing countries, the relationship between control of corruption and environmental performance is not statistically significant for developed countries. This result extends the concept of “grease the wheel” theory to environmental efficiency. Moreover, the study highlights the substantial and statistically significant impact of past environmental performance on current environmental performance. This underscores the necessity for countries to reinforce their commitment to regulating energy consumption and its resultant CO2 emissions.