Does Environmental Regulation Shape Entrepreneurship?

This study investigates the causal effect of environmental regulation on entrepreneurship. By using China’s Two Control Zones policy in 1998 as an exogenous shock and a novel dataset about firm creation, our difference-in-differences-in-differences estimation shows that environmental regulation significantly deters entrepreneurship in pollution-intensive industries. Our results are robust to a series of endogeneity and robustness tests. A plausible mechanism is that the stringent regulation increases firm’s production costs, thus reducing expected profits and crowding out entrepreneurship. Moreover, we find that environmental regulation has a sizable and statistically significant effect only on entrepreneurship in areas with low corruption, high institutional quality, as entrepreneurs can hardly evade regulations through rent-seeking activities or other means.