Go with the Wind : Spatial Impacts of Environmental Regulations on Industrial Activities in China

This paper assesses the spatial effects of environmental regulations on firm production. Exploiting the progressive rollout of a national pollution control program in China that constructed a centrally located monitoring network for every city, we find that firms located in unmonitored upwind region of the city experienced a substantially larger reduction in output than downwind firms after the program. We provide evidence that because air pollution readings become more important for political evaluations after the program and the monitoring network can capture emissions from unmonitored upwind regions, local government officials are incentivized to enforce tighter regulations on upwind firms rather than downwind firms. This spatial pattern of regulatory stringency and output gap does not occur in nonpolluting industries, in cities with no stable dominant wind direction, on state-owned enterprises that local officials have little bargaining power with, or when local officials are not age-eligible to compete for promotion