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When Do Firms Shift Production Across State to Avoid Environmental Regulation?

  • Ronald J. Shadbegian
  • Wayne B. Gray

This paper examines whether a firm's allocation of production across its plants responds to the environmental regulation faced by those plants, as measured by differences in stringency across states. We also test whether sensitivity to regulation differs based on differences across firms in compliance behavior and/or differences across states in industry importance and concentration. We use Census data for the paper and oil industries to measure the share of each state in each firm's production during the 1967-1992 period. We use several measures of state environmental stringency and test for interactions between regulatory stringency and three factors: the firm's overall compliance rate, a Herfindahl index of industry concentration in the state, and the industry’s share in the state economy. We find significant results for the paper industry: firms allocate smaller production shares to states with stricter regulations. This impact is concentrated among firms with low compliance rates, suggesting that low compliance rates are due to high compliance costs, not low compliance benefits. The interactions between stringency and industry characteristics are less often significant, but suggest that the paper industry is more affected by regulation where it is larger or more concentrated. Our results are weaker for the oil industry, reflecting either less opportunity to shift production across states or a greater impact of environmental regulation on paper mills.

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File URL: http://yosemite.epa.gov/ee/epa/eed.nsf/WPNumber/2002-02/$File/2002-02.PDF
File Function: First version, 2002
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Paper provided by National Center for Environmental Economics, U.S. Environmental Protection Agency in its series NCEE Working Paper Series with number 200202.

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Length: 38 pages
Date of creation: Feb 2002
Date of revision: Feb 2002
Handle: RePEc:nev:wpaper:wp200202
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  1. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  2. Boyd, Gale A. & McClelland, John D., 1999. "The Impact of Environmental Constraints on Productivity Improvement in Integrated Paper Plants," Journal of Environmental Economics and Management, Elsevier, vol. 38(2), pages 121-142, September.
  3. Levinson, Arik, 1996. "Environmental regulations and manufacturers' location choices: Evidence from the Census of Manufactures," Journal of Public Economics, Elsevier, vol. 62(1-2), pages 5-29, October.
  4. Robert H Mcguckin & George A Pascoe, 1988. "The Longitudinal Research Database (LRD): Status And Research Possibilities," Working Papers 88-2, Center for Economic Studies, U.S. Census Bureau.
  5. Gray, Wayne B, 1987. "The Cost of Regulation: OSHA, EPA and the Productivity Slowdown," American Economic Review, American Economic Association, vol. 77(5), pages 998-1006, December.
  6. Eli Berman & Linda T. M. Bui, 2001. "Environmental Regulation And Productivity: Evidence From Oil Refineries," The Review of Economics and Statistics, MIT Press, vol. 83(3), pages 498-510, August.
  7. Wayne B. Gray & Ronald J. Shadbegian, 1997. "Environmental Regulation, Investment Timing, and Technology Choice," NBER Working Papers 6036, National Bureau of Economic Research, Inc.
  8. Harrington, Winston, 1988. "Enforcement leverage when penalties are restricted," Journal of Public Economics, Elsevier, vol. 37(1), pages 29-53, October.
  9. Mary E. Deily & Wayne B. Gray, 1989. "Enforcement of pollution regulations in a declining industry," Working Paper 8912, Federal Reserve Bank of Cleveland.
  10. Barbera, Anthony J & McConnell, Virginia D, 1986. "Effects of Pollution Control on Industry Productivity: A Factor Demand Approach," Journal of Industrial Economics, Wiley Blackwell, vol. 35(2), pages 161-72, December.
  11. Henderson, J Vernon, 1996. "Effects of Air Quality Regulation," American Economic Review, American Economic Association, vol. 86(4), pages 789-813, September.
  12. Berman, E. & Bui, L.T., 1997. "Environmental Regulation and Labor demand: Evidence from the South Coast Air Basin," Papers 82, Boston University - Industry Studies Programme.
  13. Wayne B. Gray & Ronald J. Shadbegian, 1995. "Pollution Abatement Costs, Regulation, and Plant-Level Productivity," NBER Working Papers 4994, National Bureau of Economic Research, Inc.
  14. Fare, Rolf, et al, 1989. "Multilateral Productivity Comparisons When Some Outputs Are Undesirable: A Nonparametric Approach," The Review of Economics and Statistics, MIT Press, vol. 71(1), pages 90-98, February.
  15. Gollop, Frank M & Roberts, Mark J, 1983. "Environmental Regulations and Productivity Growth: The Case of Fossil-Fueled Electric Power Generation," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 654-74, August.
  16. Timothy J. Bartik, 2002. "The Effects of Environmental Regulation on Business Location in the United States," Book chapters authored by Upjohn Institute researchers, in: Wayne B. Gray (ed.), Economic Costs and Consequences of Environmental Regulation, pages 129-151 W.E. Upjohn Institute for Employment Research.
  17. Wayne B. Gray, 1997. "Manufacturing Plant Location: Does State Pollution Regulation Matter?," NBER Working Papers 5880, National Bureau of Economic Research, Inc.
  18. Virginia D. McConnell & Robert M. Schwab, 1990. "The Impact of Environmental Regulation on Industry Location Decisions: The Motor Vehicle Industry," Land Economics, University of Wisconsin Press, vol. 66(1), pages 67-81.
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