CREDIT Development Seminar: Namrata Kala (MIT)

 Environmental regulation and firm size 

The trade-off between jobs and environmental quality is of first order importance. In this paper, we construct a novel dataset on the universe of all applications by firms to establish polluting activities in five Indian states, and combine it with a natural experiment that reduced the environmental regulatory burden in some sectors. We use a difference-in-difference strategy comparing sectors with the same pollution potential, to estimate the impact of environmental regulation on firm size, job creation, and polluting behavior. Moving from a high to intermediate level of regulatory burden induces smaller firms to enter, and increases entry in the longer-term. Moving from an intermediate to low level of regulatory burden has no effect. We show that standard firm data sources would miss the sizable effects of environmental regulation on firm size, and dimensions of behavior such as attempted entry. Finally, we leverage unique data on communication between the firm and the regulator and between regulatory agents to uncover mechanisms, and to contribute a richer understanding of the difference between de jure vs. de facto enforcement of regulation. Application fees for affected applicants fell, and they faced less environmental scrutiny – their applications were reviewed by fewer officials, and were more likely to be decided on by junior officials. ​