Regulating Conglomerates in China: Evidence from an Energy Conservation Program

We study a prominent energy regulation affecting large Chinese manufacturers that are part of broader conglomerates.Using detailed firm-level data and difference-in-differences research designs, we show that regulated firms cut output and shifted production to unregulated firms in the same conglomerate instead of improving their energy efficiency.Conglomerate spillovers account for 40% of the output loss of regulated firms and substantially reduce aggregate energy savings.Using a structural model, we show that alternative polices that use public information on business networks could lower the shadow cost of the regulation by more than 40% and increase aggregate energy savings by 10%.