Is There a Pollution Haven Effect? Evidence from a Natural Experiment in China
32 Pages Posted: 14 May 2012
Date Written: May 1, 2012
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.
Keywords: pollution haven effect, difference-in-differences estimation, two control zones, natural experiment
JEL Classification: R11, L25, D22
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