Production and Externalities: How Corporate Governance Shapes Social Costs

We study how corporate governance affects social costs. Our parsimonious principal-agent model with production externalities predicts that when monitoring costs rise, firms increasingly rely on high-powered incentives that prioritize output, leading to increased production intensity but higher social costs. We confirm this mechanism using asset-level data on production and workplace safety in the coal industry. To establish causality, we exploit plausibly exogenous increases in monitoring costs driven by politically motivated coal divestment mandates imposed on prominent activist institutional investors. Our findings show that governance choices can inadvertently amplify social costs, revealing an important but underexplored consequence of corporate governance design.