Cross country comparisons of environmental efficiency under institutional quality. Evidence from European economies

Purpose The paper aims at addressing the following research questions: does institutional quality improve countries' environmental efficiency? And which pillars of institutional quality improve countries' environmental efficiency? Design/methodology/approach By specifying a directional distance function in the context of stochastic frontier method where GHG emissions are considered as the bad output and the GDP is referred as the desirable one, the work computes the environmental efficiency into the appraisal of a production function for the European countries over three decades. Findings According to the countries' performance, the findings confirm that high and upper middle-income countries have higher environmental efficiency compared to low middle-income countries. In this environmental context, the role of institutional quality turns out to be really important in improving the environmental efficiency for high income countries. Originality/value This article attempts to analyze the role of different dimensions of institutional quality in different European countries' performance – in terms of mitigating GHGs (undesirable output) – while trying to raise their economic performance through their GDP (desirable output). Highlights The paper aims at addressing the following research question: does institutional quality improve countries' environmental efficiency? We adopt a directional distance function in the context of stochastic frontier method, considering 40 European economies over a 30-year time interval. The findings confirm that high and upper middle-income countries have higher environmental efficiency compared to low middle-income countries. The role of institutional quality turns out to be really important in improving the environmental efficiency for high income countries, while the performance decreases for the low middle-income countries.