The political economy of firm emissions: Evidence from a quasi-natural experiment in China

This study investigates how the career concerns of politicians shape local firms' pollution behaviors in the context of China. Based on a unique government administrative dataset of firms' toxic emissions, we exploit the shock of the Chinese central government introducing environmental protection into the performance evaluation criteria of local politicians, which creates incentives for local officials to reduce pollution, to conduct a difference-in-differences estimation. We present the strong effects of political incentives in decreasing firms' pollution emissions. Our findings are robust to alternative measures and different specifications. Plausible mechanisms driving our results may be the increase of bank loans and the decrease of tax intensity. Furthermore, local governments facing promotion pressures exhibit substantial incentives to enhance local firms engaging in high-level environmental protection. Our findings are particularly significant for firms with less financial constraints, those owned by governments, and those in non-pollution industries and regions with a high marketization level. Overall, this study sheds new light on the determinants of firms’ emissions behaviors in a typical emerging economy.