Unintended innovation effects of environmental regulations : Evidence from pollution reduction mandates over China’s Five-Year Plans

This paper uses a unique large-size data set from China's most developed areas to examine the innovation impacts of environmental regulations. Reduction mandates on designated pollutants between the 10th and the 12th Five-Year Plans (2001–2015) are explored to construct spatial and temporal variations in the stringency of environmental regulations faced by industrial firms. To address endogeneity concern, we calculate city-level fair pollution reduction mandates according to each city’s contribution to national pollution emissions and use them as instrumental variables of planned ones. Our empirical results reveal that while air pollution regulation (APR) has some but limited innovation-motivating effects, water pollution regulation (WPR) hinders firm innovation. Heterogeneity effect analysis reveals that the different innovation effects are because WPR is more pervasive over time and across regions and industries, thereby more stringent than APR. We also test several channels that drive these effects