Effects of Clean Water Act Regulations on Firm-Level Decisions in Agriculture

U.S. environmental regulations often vary by the size of the operation, with larger operations facing more regulatory stringency. When the size distribution of firms is heavily skewed, regulation size thresholds can reduce transaction costs for regulatory agencies while bringing most production within a regulatory framework. However, size-based regulation may have unintended consequences if operations downsize, slow their growth, or enter at a smaller size in order to avoid regulation. These unintended consequences from regulation may include less pollution abatement and diminished economic efficiency. In this study we examine recently revised Clean Water Act (CWA) regulations targeting large-scale livestock operations to identify and quantify farm responses to this regulation. We find statistical evidence that farms adjust size in order to avoid regulation. Additionally farms in states with relatively higher costs of regulatory compliance experience on average 23% less growth than comparable farms in other states, net of prior state-level trends in growth. In these states, regulated farms also experience a 5.8% greater chance of exit.