Green accounting, institutional quality and investment decisions: Macroeconomic implications from an analysis of the oil and mining sector

This paper investigates the effect of institutional quality on sustainable development.Institutional quality is assumed to determine the (perceived) risk in the face of which oil and mining firms determine their level of investment in physical and natural capital. Since these two types of capital are used jointly in the industry's production process, the firms face a dual investment decision, whereby they have to decide on the investment into both types of capital simultaneously. It is shown that this production structure implies that better institutional quality can increase as well as decrease the speed of resource extraction. However, due to the structure of national accounting data, this fact has so far not been adequately accounted for in preceding studies. By integrating the dual investment model into the green accounting approach it is then shown that the form of capital aggregation in national accounting can lead to an underestimation of the effect of institutional quality on sustainable development and potentially on economic growth. The results imply that it could be useful to investigate the macroeconomic effects of institutional quality on the oil and mining sector separately from those on the rest of the economy.