Opening the black box of capacity governance: Environmental regulation and capacity utilization of microcosmic firms in China

The existing literature primarily explores overcapacity governance from the perspective of industrial policies, and few studies have directly examined the relationship between environmental regulation and overcapacity. However, the production scale expansion caused by neglecting environmental costs is the key reason for overcapacity. Based on the matching data of Chinese firms in the years 2000–2010, this study empirically explores the influence and channels of environmental regulation on the capacity utilization of firms. A benchmark analysis finds that environmental regulation improves the capacity utilization of firms. On exploring the plausible channels, we show that environmental regulation improves capacity utilization by promoting technical progress and correcting market distortion and inhibits capacity utilization by increasing production costs. This study opens the black box of capacity governance from a micro perspective and provides a scientific basis for realizing capacity governance.