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New evidence on the soft budget constraint: Chinese environmental policy effectiveness in SOE-dominated cities

Mathilde Maurel () and Thomas Pernet
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Mathilde Maurel: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CNRS - Centre National de la Recherche Scientifique
Thomas Pernet: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, UP1 UFR02 - Université Paris 1 Panthéon-Sorbonne - UFR d'Économie - UP1 - Université Paris 1 Panthéon-Sorbonne

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: This paper analyzes the efficiency of a set of environmental measures introduced by China's 11th Five-Year Plan in 2006, using a rich and unique data set assembled from the Ministry of Environmental Protection and the State Environmental Protection Agency. By exploiting plausibly exogenous variation in regulatory stringency generated by the regulatory system across China's provinces, we find evidence that pollution-intensive cities reduced their SO2 emissions substantially, whereas cities with a strong state-owned enterprise (SOE) presence did not. We interpret the results as pointing to evidence of Chinese SOEs' ongoing soft budget constraints. The findings are robust to the inclusion of different fixed effects and other key determinants of pollution. Moreover, we investigate the main factors underlying regulatory non-compliance: the overlapping (or not) of "Two Control Zone" (Special Policy Zone, Coastal) cities wherein environmental (growth) policies are prioritized; the existence of turning points below (above) which growth and reductions in pollution substitute for (complement) each other; the size and extent of industrial concentration, which determines the possibilities of firms negotiating with the local authorities; and finally, the regulation-induced adoption of cleaner technologies by polluting firms, which enhance productivity and lower SO2 emissions.

Keywords: Environmental regulation; China; Kornai; Soft budget constraint; Difference-in-difference estimation (search for similar items in EconPapers)
Date: 2020
Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-02919936
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Published in Public Choice, Springer Verlag, In press, ⟨10.1007/s11127-020-00834-1⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:cesptp:hal-02919936

DOI: 10.1007/s11127-020-00834-1

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