Firm's response and unintended health consequences of industrial regulations

Regulations that constrain firms' externalities in one dimension can distort incentives and worsen externalities in other dimensions. In Peru's industrial fishing sector, the world's largest, fishing boats catch anchovy that plants along the coast convert into fishmeal. Matching administrative, daily data on plant production, ground-level air quality data, hospital admissions records, and survey data on individual health outcomes, we first show that fishmeal production negatively affects adult and child health through air pollution emitted by plants. We then analyze the industry's response to a 2009 reform that split the Total Allowable Catch (TAC) into boat-specific, transferable quotas (ITQs) to preserve fish stocks and reduce overcapacity. As predicted by a two-sector model with heterogeneous plants, on average across locations, fishmeal production was spread out in time, for two reasons: (i) boats' incentive to "race" for fish was removed, and (ii) production fell in inefficient plants (and locations) and increased, in the time dimension, in efficient plants (and locations). The reform greatly exacerbated the industry's impact on health, causing a loss of about 1.4 million disability-adjusted life years. We show that the reason is that longer periods of moderate air pollution are worse for health than shorter periods of higher intensity exposure. Our findings demonstrate the risks of piecemeal regulatory design, and that the common policy trade-off between duration and intensity of pollution exposure can be critical for industry's impact on health.