Environmental regulation and firms' performance: a quasi-natural experiment from China

This paper investigates whether environmental regulation affects firm's performance including productivity, wage and employment using firm-level data in 1996-2007. The identification uses Two Control Zones (TCZ) policy implemented by the Chinese government in 1998, in which tougher environmental regulations were imposed in TCZ cities but not others. By difference-in-differences estimation, we find that tougher environmental regulation leads to larger increase on both total factor productivity and wage, and firms tend to employ fewer workers under pressure of environmental protection. Heterogeneous tests show that the impacts are better for non-pollution intensive firms, non-exporters and SOEs. Finally, we find that R&D input and exiting firms among industry are the driving forces for enhancing TFP and increasing wage and unemployment.