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Abstract

This paper provides empirical evidence in support of the Porter hypothesis that tighter environmental regulations can increase productivity under certain circumstances. It builds on a theoretical model in which environmental regulations induce firms to adopt more efficient technologies. Using Chinese firm-level data covering a ten-year period, the empirical study examines the effects of two specific policy instruments - the pollution levy and regulatory standards - on firm productivity. It finds a bell-shaped relationship between pollution levies and the total factor productivity of firms, indicating that an increase in the pollution levy rate can be associated with higher productivity. In addition, the study investigates the effect of pollution emission standards on firm productivity and identifies an initial negative effect which diminishes after a period of two to three years.

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