Industrial Activity, State Capacity, and Deforestation: Evidence from Brazil

Does industrial activity drive deforestation and land degradation, and can limited state capacity be overcome to decouple economic growth from environmental harm? We examine these questions in the context of slaughterhouse plant openings in Brazil from 1994 to 2019. Guided by a simple conceptual framework and using a staggered difference-in-differences approach, we show that plant openings increase livestock production while reducing forest cover and degrading pastureland. However, following the introduction of legally enforceable, incentive-compatible agreements between slaughterhouses and federal prosecutors—which penalize purchases of livestock from illegally deforested areas but act as a green certification mechanism—plant openings increase productivity without driving deforestation. Our findings suggest that tying firm performance to environmental goals through market-aligned legal mechanisms can generate economic and environmental gains at low cost to the government.