Pay for air pollution: Ecological compensation policy and corporate investment

This paper investigates the impact of the air ecological compensation (AEC) policy of China on corporate investment in air pollution control. Based on an empirical analysis by the difference-in-differences method, we find that heavily polluting firms significantly increase their air pollution control investment following the AEC policy. Corporate investment is driven by local governments' efforts that the AEC policy makes local governments pay more attention to air pollution control, and raise green subsidies to firms. Besides, the air pollution control investment of state-owned firms is more clearly affected by the AEC policy than others. Higher air pollution risks and shorter policy assessment cycles both make firms more likely to increase investment in air pollution control with the impact of the AEC policy. This paper provides an explanation for the effect mechanism of the AEC policy from a corporate investment perspective that also increases the knowledge of the economic impacts of ecological compensation policies.