Regulatory Sanctions and Firm Environmental Performances in China

One major challenge for improving environmental quality in developing countries is the enforcement of environmental regulations. There are different enforcement instruments available to environmental agencies and it is still not well understood how effective these instruments are in developing countries. This paper evaluates the effectiveness of regulatory sanctions – monetary fines, temporary suspension of production, rectification, and long-term factory shutdown – in changing a non-compliant firm’ environmental spending and emissions. We construct a panel dataset of 6,529 major polluting firms in Hunan province, China, 2011-2015. Combining matching with a difference-in-differences (DID) approach, we find that sanctions concerning water pollution violations increased firms’ operating expenses in wastewater treatment and decreased water pollutant emissions. We did not find significant impact for sanctions associated with air pollution, which might be explained by Hunan’s greater susceptibility to water pollution and its provincial government’s emphasis on improving water quality. We further find that it was mostly the mere action of sanctioning that serves warning purposes to violators, rather than sanction severity or media disclosure of sanctions, that changed firm behaviors. Finally, there exists little spillover effect from sanctioned firms to unsanctioned firms in the same county or same industry. Part of the Energy and Environmental Economics and Policy (EEEP) Seminar Series—Fall 2020 All the events will be https://psu.zoom.us/j/91419785635?pwd=ZU1YenNNQ1M5ME9CZyswenBKa2Y0dz09