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The Effect of Clean Water Regulation on Profitability: Testing the Porter Hypothesis

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  • Dylan G. Rassier
  • Dietrich Earnhart

Abstract

Previous theoretical research provides opposing arguments regarding the effect of environmental regulation on profitability. This study provides empirical evidence on this debated effect by testing the "strong" version of the Porter hypothesis. We employ panel data analysis to examine the effect of water regulation, as measured by permitted wastewater discharge limits, on the profitability of publicly held firms operating within the chemical manufacturing industries. We find that tighter water regulation meaningfully lowers profitability. By reinterpreting profitability in terms of sales and costs, the results demonstrate that tighter water regulation increases costs conditioned on a given level of sales.

Suggested Citation

  • Dylan G. Rassier & Dietrich Earnhart, 2010. "The Effect of Clean Water Regulation on Profitability: Testing the Porter Hypothesis," Land Economics, University of Wisconsin Press, vol. 86(2), pages 329-344.
    • Handle: RePEc:uwp:landec:v:86:y:2010:i:2:p:329-344
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    References listed on IDEAS

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    1. Ambec, Stefan & Barla, Philippe, 2002. "A theoretical foundation of the Porter hypothesis," Economics Letters, Elsevier, vol. 75(3), pages 355-360, May.
    2. Dean, Thomas J. & Brown, Robert L. & Stango, Victor, 2000. "Environmental Regulation as a Barrier to the Formation of Small Manufacturing Establishments: A Longitudinal Examination," Journal of Environmental Economics and Management, Elsevier, vol. 40(1), pages 56-75, July.
    3. Michael Greenstone, 2002. "The Impacts of Environmental Regulations on Industrial Activity: Evidence from the 1970 and 1977 Clean Air Act Amendments and the Census of Manufactures," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1175-1219, December.
    4. Runar Brännlund & Rolf Färe & Shawna Grosskopf, 1995. "Environmental regulation and profitability: An application to Swedish pulp and paper mills," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 6(1), pages 23-36, July.
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    More about this item

    JEL classification:

    • K23 - Law and Economics - - Regulation and Business Law - - - Regulated Industries and Administrative Law
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects

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