Do credit constraints favor dirty production? Theory and plant-level evidence
Journal of Environmental Economics and Management, 2017, vol. 84, issue C, 189-208
This paper explores the effect of credit constraints on production-generated pollution emissions. I develop a theoretical model wherein polluting firms borrow externally to finance investment in various assets, subject to a credit constraint. The main insight of the model is that credit constraints distort the composition of assets towards over-investment in tangible assets, which can be pledged as collateral, thereby increasing the intensity of emissions. The predictions of the model are tested using a unique dataset consisting of plant-level measures of pollution emissions and creditworthiness. The empirical results indicate that credit constraints significantly increase pollution emissions (even after accounting for the scale effect), and the results withstand multiple robustness checks. Moreover, the effect of credit constraints is particularly acute in industries with greater reliance on external credit. Finally, I demonstrate that firm-level credit constraints distort the composition of assets and that the composition of assets influences pollution emissions.
Keywords: Pollution emissions; Credit constraints; Manufacturing plants (search for similar items in EconPapers)
JEL-codes: G32 L6 Q53 (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:84:y:2017:i:c:p:189-208
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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates
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