Going Green in China: Firms' Responses to Stricter Environmental Regulations

NBER Working Paper No. 26540

Issued in December 2019

NBER Program(s):Environment and Energy Economics, Public Economics, Productivity, Innovation, and Entrepreneurship



This paper examines the effect of stringent environmental regulations on firms' environmental practices, economic performance, and environmental innovation. Reducing COD levels by 10% relative to 2005 levels is an aim of the Chinese 11th Five-Year Plan. Using a difference-in-differences framework based on a comprehensive firm-level dataset, we find that more stringent environmental regulations faced by firms are positively associated with a greater probability of reducing COD emissions; also, there exists an evident heterogeneous effect across industries with different pollution intensities. Stricter environmental regulations also account for the sharp decline in firms' profits, capital, and labor. After executing a complete chain of tests of the underlying mechanisms, we find that firms rely more on recycling and abatement investment than on innovations when meeting environmental requirements.

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Document Object Identifier (DOI): 10.3386/w26540