Is it more effective for national regulators to go directly to the city level to enforce environmental laws?

We examine the effectiveness of a new approach of using a direct inspection program on all environmental laws on the firm-level environmental investment in China. The direct inspection program is a response to the continued pollution issues despite the increased effort in the actions of regulatory agencies and their agents. Our findings suggest that firms located in direct inspection cities perform better than those located in non-direct inspection cities in terms of environmental investments. The findings are robust to a battery of robustness checks. Using dynamic analysis, we find that the effect of the direct inspection program lasts at least two years. Our further analysis shows that firms in direct inspection cities respond better to environmental enforcement and non-stated owned firms receive more subsidies than firms in non-direct inspection program cities. The major take away from our analysis is that, in emerging economies, it is more effective to go directly to the city level to enhance the actions of regulatory agencies and their agents. Cutting layers of agencies can enhance firm-level environmental investment. (C) 2020 Elsevier B.V. All rights reserved.