The impact of environmental regulation on output -- gross versus net impacts

Objectives: This paper tests the impact of state environmental regulatory stringency on firms’ allocation of production across states.  Much of the existing research on the impact of regulatory stringency on plant location and economic activity has used county non-attainment status with air pollution regulations to measure stringency.  That research has found significant impacts on plant location and employment, but it is not clear whether the results reflect a reallocation of economic activity across counties or an overall decline in activity.  By examining firm-level decisions, we can look at both production reallocation across plants and the firm’s total production across all its plants.

Data/Methods: Our analysis uses plant-level Census microdata for pulp and paper mills during the 1967-2012 period.  We focus on firms which own plants at any point in four or more states, to avoid firms that might have less opportunity to shift production across states.  We model the firms’ production shares in each state with a conditional logit specification, testing several measures of state regulatory stringency, including county non-attainment status, and controlling for other state characteristics that might affect production costs and production location. The conditional logit approach enables us to measure within-firm allocation of production across plants.  We test for heterogeneity across firms in how much they respond to regulatory stringency.  We also examine overall firm-level production and relate this to the regulatory stringency faced by the firm, to see whether production cuts in stricter states are offset (partially or completely) by gains in less strict states.

Expected Results:  Our results will provide information about the impact of regulatory stringency on firm-level production allocation.  We anticipate that firms will tend to shift production away from states with more stringent environmental regulations, but rather than simply focusing on the gross impacts – differences between high- and low-stringency states – we will also consider the net impacts on overall production levels, which might well be smaller than the gross impacts.