Topic: Separating Firm Competitiveness and Ambient Effects

Lecturer: Assistant Prof. Peng Zhang, School of Management and Economics, The Chinese University of Hong Kong, Shenzhen

Time: 10:00-11:00 a.m. June 14th, 2023

Venue: B423 Zhixin Building, Central Campus

Abstract: Measuring environmental regulation’s effect on firm competitiveness is central to designing optimal policies. Existing studies document significant negative effects of air pollution regulations on manufacturing competitiveness as measured by total factor productivity (TFP). A separate literature finds that air pollution lowers TFP through its ambient effect on workers' physical and mental health and cognition. Extant empirical measures of the competitiveness effect reflect both. We develop a boundary-discontinuity-difference-indifferences (BD-DD) approach to isolate the competitiveness effect: only regulated firms suffer the competitiveness effect but both regulated and unregulated firms adjacent to each other enjoy the ambient effect via spillovers. We apply the approach to a major air pollution regulation in China. The traditional approach to estimating the regulation’s effect yields a 3.8% TFP decline at a total cost of CNY 30.2 billion annually. The true competitiveness effect is 6.4%(51.6billion). The implied ambient effect is 2.6%(21.4 billion)among regulated firms. While difficult to quantify, proximate unregulated firms also enjoy the ambient effect.