Is There a Pollution Haven Effect? Evidence from a Natural Experiment in China

Lu, Yi and Wu, Mingqin and Yu, Linhui (2012): Is There a Pollution Haven Effect? Evidence from a Natural Experiment in China.

Abstract

In this paper, we investigate whether there is a pollution haven effect, specifically, the effect of environmental regulations on firm location. Our identification uses the Two Control Zones (TCZ) policy implemented by the Chinese government in 1998. The difference-in-differences (DID) estimation shows that cities with tougher environmental regulations attract less foreign direct investment (FDI). Specifically, being listed as a TCZ city causes the amount of FDI to drop by 41%. Our results are robust to various robustness checks on the validity of the DID estimation and other estimation concerns.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pollution haven effect; Difference-in-differences estimation; Two control zones; Natural experiment
• Subjects: D - Microeconomics > D2 - Production and Organizations > D21 - Firm Behavior: Theory; L - Industrial Organization > L2 - Firm Objectives, Organization, and Behavior > L25 - Firm Performance: Size, Diversification, and Scope; R - Urban, Rural, Regional, Real Estate, and Transportation Economics > R1 - General Regional Economics > R11 - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes

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