The Geography of Pollution Regulation and Productivity

This paper examines the distributional effects of air pollution regulations on productivity growth arising from firm and location heterogeneities by combining geolocated industrial firm data, detailed product and pollution information. The analysis relies on an instrumental variable based on the land-side sources of pollution emission to examine China's "Two Control Zones" policy, the national air pollution regulation implemented in 1998. We find that this policy not only has a negative and persistent impact on the productivity growth of surviving firms, but also introduces heterogeneity and generates spillovers. The effect is disproportionally borne by initially more productive firms and spreads throughout the industrial network, particularly when local industries have higher relatedness. Additional results shed light on the industrial transition channels at work such as reducing coal consumption as an input and reconfiguring the product mix.