How do environmental regulations influence resource misallocation in China? The role of investment flows

Abstract

In recent years, the Chinese government has implemented numerous regulations to address environmental deterioration. Several studies have examined the effect of environmental regulation policies on China's economic performance. However, whether environmental regulations can alleviate China's resource misallocation problem—a critical issue in transitional economies—remains unclear. This study fills this gap in the literature by employing the difference‐in‐differences method to examine how environmental regulations affect resource misallocation. We found that stringent environmental regulations have reduced the extent of resource misallocation in China, with resource reallocation being the driving force behind this improvement. The emission reduction mandate reduces investment inflows and hinders firms' entry into regions with low total factor productivity, while directing the flow of resources to highly productive areas.

The impact of environmental regulations on enterprise production——Based on the production game model

“…They found that environmental regulation policies can effectively promote enterprise R&D activities and improve energy e ciency (Mandal's 2010; Lanoie et al 2011;. At the same time, environmental regulations could stimulate enterprises with a high degree of environmental protection to enter the market, and force high-polluting and high-emission enterprises to exit the market (Du et al 2020;Li et al 2021). Because, the introduction of environmental regulations would signi cantly increase the entry cost and the capacity adjustment cost (Ryan 2012).…”

The impact of environmental regulations on enterprise production

“…They found that environmental regulation policies can effectively promote enterprise R&D activities and improve energy efficiency (Mandal's 2010;Lanoie et al 2011;Li et al 2020). At the same time, environmental regulations could stimulate enterprises with a high degree of environmental protection to enter the market, and force high-polluting and high-emission enterprises to exit the market (Du et al 2020;Li et al 2021). Because, the introduction of environmental regulations would significantly increase the entry cost and the capacity adjustment cost (Ryan 2012).…”

An Analysis of the Impact of COVID-19 Pandemic on Regional Inequality in China

“…There are mainly two ways that can cause an increase in regional inequality in China. First, there is a city-level resource misallocation in China [7]. All the best resources are found in first-tier cities, and all the citizens in the city are the biggest beneficiary by receiving considerable welfare.…”