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Environmental regulation, local production networks and pollutant outsourcing

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  • Li, Jie
  • Lu, Angdi

Abstract

This paper investigates how environmental regulations targeting upstream, pollution-intensive industries spill over to downstream firms—i.e., those that purchase and use the outputs of regulated sectors as intermediate inputs. Tighter upstream regulation can raise input costs and create supply uncertainty as regulated suppliers adjust production, which may prompt downstream buyers to substitute toward imported intermediates. Exploiting cross-province variation in regulatory intensity during China’s 11th Five-Year Plan and differences in industries’ pollutant emission profiles, we construct province–industry-level measures of chemical oxygen demand (COD) regulation stringency. Using a triple-differences design, we show that when upstream industries face tighter regulation, downstream firms in the same province increase imports of the inputs on which they rely more heavily. Mechanism analysis suggests that rising production costs and disruptions in upstream supply chains are the primary drivers of this adjustment.

Suggested Citation

  • Li, Jie & Lu, Angdi, 2026. "Environmental regulation, local production networks and pollutant outsourcing," Journal of Economic Behavior & Organization, Elsevier, vol. 245(C).
    • Handle: RePEc:eee:jeborg:v:245:y:2026:i:c:s0167268126001204
    DOI: 10.1016/j.jebo.2026.107534
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    Keywords

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    JEL classification:

    • F1 - International Economics - - Trade
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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