Environmental Regulations, Political Incentives and Local Economic Activities: Evidence from China*

Abstract

How do nationwide environmental regulations produce heterogeneous effects on the economic activities of manufacturing firms located in places with differently incentivized city leaders? This paper answers this question by drawing on a set of firm‐based pollution regulations in China from 2007 to investigate the relationship between political incentives and the effects of environmental regulations. I show that when a city's Party secretary has more incentives to be promoted, the adverse impacts on production by regulated firms tend to increase, but these losses for regulated firms are compensated by gains for other unregulated firms in polluting industries. Therefore, no overall reduction is seen in the manufacturing activities of the polluting industries. The findings suggest that if multitask problems for local governments are properly addressed, environmental regulations can effectively reduce the pollution and avoid large unintended costs to economic growth.

The Impact of Environmental Regulation on Firm Performance: Evidence from the Pulp and Paper Industry in China

“…ASIF documents comprehensive information on state-owned and non-state-owned industrial firms, which is conducted by China’s National Bureau of Statistics (NBS). ASIF is the most extensive firm-level dataset utilized in research on China’s microeconomics [ 10 , 14 , 25 , 36 , 37 , 38 ].…”

“…Previous literature has investigated the impact of water environmental protection regulations on pollution emission [ 13 , 16 , 17 , 18 ] and firm productivity [ 10 , 19 ], while a few researchers focus on the reallocation effect of firm production. Most of the existing literature focuses on the reallocation effect of pollution [ 20 , 21 ], capital [ 4 , 22 ], and labor demand [ 14 , 23 , 24 ] across regions, but little pay attention to the reallocation effect of production across firms within the same region [ 25 ]. Prior studies find that the reallocation effect of production from regulated to unregulated firms appears not only within the same regulated industries [ 25 , 26 ], but also within the same conglomerate [ 27 ].…”

“…Most of the existing literature focuses on the reallocation effect of pollution [ 20 , 21 ], capital [ 4 , 22 ], and labor demand [ 14 , 23 , 24 ] across regions, but little pay attention to the reallocation effect of production across firms within the same region [ 25 ]. Prior studies find that the reallocation effect of production from regulated to unregulated firms appears not only within the same regulated industries [ 25 , 26 ], but also within the same conglomerate [ 27 ]. This paper is devoted to previous studies documenting evidence of the reallocation effect across regulated firms within the same regulated industries and areas.…”

Impacts of the political incentive for environmental protection on industrial land supply: Evidence from the cadre evaluation system reform in China

“…8 8 The use of the other policy tool is also documented in recent research, for example, when facing higher pollutant emission reduction pressure, a local leader lowers their economic growth target (Zhang, 2020) and suppresses production by the regulated firms while promoting production by unregulated firms (Bo, 2020). …”

“…It is also found in the paper ofKahn et al (2015) that water pollutants such as petroleum, mercury, and phenol do not significantly reduce at boundaries. None of these pollutants are in the objective performance criteria, although they are more harmful to public health.8 The use of the other policy tool is also documented in recent research, for example, when facing higher pollutant emission reduction pressure, a local leader lowers their economic growth target(Zhang, 2020) and suppresses production by the regulated firms while promoting production by unregulated firms(Bo, 2020). 9 This planning system includes five levels: nation, province, prefecture, county, and township.…”