Do Environmental Regulations Do More Harm Than Good? Evidence from Competition and Innovation

Do Environmental Regulations Do More Harm Than Good? Evidence from Competition and Innovation

Rui Dai, Rui Duan, Lilian Ng

Series number :

Serial Number: 
725/2021

Date posted :

January 07 2021

Last revised :

January 21 2021
SSRN Share

Keywords

  • Corporate Environmental Policy • 
  • product market competition • 
  • Green Innovation • 
  • Economic Consequences

This study examines whether and how competition affects corporate strategic responses to stringent environmental policies. Using the nonattainment status of U.S. counties as a source of exogenous variation in environmental regulation, we find that competition fosters green innovation as firms respond to stricter regulatory policy.

 Additional analyses using a subsample of firms in counties whose pollutant concentrations are marginally above or below EPA standards for regional air quality and exploiting exogenous variations in product market competition further reinforce our baseline evidence. The results suggest that the cost of relocation is a critical mechanism that compels firms to innovate when responding to tightened environmental policies and heightened competitive pressure.  Regulation-induced green innovation helps competitive firms better achieve product differentiation and attract more corporate customers than their less competitive peers.  Finally, competitive firms' strategic responses to stringent environmental regulations result in improved market share growth, markup, profit margin, and abnormal returns. 

Authors

Real name:
Rui Dai
Real name:
Rui Duan
Real name:
Research Member
Schulich School of Business, York University