We argue that misallocation across firms amplifies industrial water pollution by distorting the firm size distribution in China. Firm-level data indicate that larger firms are more likely to use clean technology but face higher distortions. In a heterogeneous firms model with an endogenous choice of pollution treatment technologies, we show that distortions that increase with firm-level TFP lower the adoption of clean technology, amplify aggregate pollution intensity, and lower aggregate output. Quantitatively, eliminating these correlated distortions would increase output by 30 percent and decrease pollution by 20 percent. Meanwhile, environmental regulations have sizable impact on pollution but limited effects on aggregate output.
Qi, Ji, Xin Tang, and Xican Xi.
"The Size Distribution of Firms and Industrial Water Pollution: A Quantitative Analysis of China."
American Economic Journal: Macroeconomics,
Economic Development: Agriculture; Natural Resources; Energy; Environment; Other Primary Products
Industrialization; Manufacturing and Service Industries; Choice of Technology
Socialist Systems and Transitional Economies: Natural Resources; Energy; Environment
Socialist Enterprises and Their Transitions
Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
Environmental Economics: Government Policy