This paper estimates the effect of environmental regulation on firm productivity using a spatial regression discontinuity design implicit in China’s water quality monitoring system. Because water quality readings are important for political evaluations, and the monitoring stations only capture emissions from their upstream regions, local government officials are incentivized to enforce tighter environmental standards on firms immediately upstream of a monitoring station, rather than those immediately downstream. Exploiting this discontinuity in regulation stringency with novel firm-level geocoded emission and production datasets, we find that immediate upstream polluters face a more than 24% reduction in Total Factor Productivity (TFP), and a more than 57% reduction in chemical oxygen demandemissions, as compared to their immediate downstream counterparts. We find that the discontinuity in TFP does not exist in non-polluting industries, only emerged after the government explicitly linked political promotion to water quality readings, and was predominantly driven by prefectural cities with career-driven leaders. Linking the TFP estimate with the emission estimate, a back of the envelope calculation indicates that China’s water regulation efforts between 2000 and 2007 was associated with aneconomic costof more than 800billion Chinese yuan.
Files and links
Request a publication
Due to Copyright we cannot publish this article but you are very welcome to request a copy from the author. Please just fill in the information beneath.