Environmental Regulation, Scrutiny and Firm Outcomes

Firm and worker productivity levels remain persistently low in developing countries, while the health burden associated with pollution is getting worse. Policies that aim to balance environmental protection with economic growth are thus key for sustainable development. However, it is difficult to evaluate the impact of such regulatory burdens on firm behaviour as the standard data sources in Low-Income Countries tend to only provide information on large, active, and formal firms at an annual frequency (i.e. the ASI in India). In the context of a large change in environmental policy in India in 2016, this project studies how changes in regulatory burden affect environmental compliance and firm outcomes across the firm size distribution. The project will use data that does not only represent large and formal firms, and is collected at a higher temporal frequency than annual. 

The 2016 policy reduced the burden of environmental regulation for certain sectors only. The study’s methodology thus exploits a significant aspect of this policy in that, prior to this change, sectors with similar pollution potential were facing different regulatory burdens. The context is uniquely suited to a difference in difference analysis and event-study framework to estimate the policy impact on firm entry, size, and environmental compliance. The researchers will combine this natural experiment with a newly assembled dataset of applications made by firms seeking permission from the environmental regulatory authority in five states in India (state-level pollution control boards) to set up new activities or firms, as well as renew existing permits. These data will contain information on firm size and polluting behaviour (wastewater discharge) for new, incumbent, and expanding firms, including those firms that were denied permission to produce. In terms of evaluating the impact of the change in the regulatory burden on environmental compliance, they will apply machine learning techniques to satellite imagery using training data collected via fieldwork to assess whether a firm obeys location restrictions. 

The findings of this project will be useful for regulatory and environmental authorities in low-income countries. In particular, the study will be of direct interest to the Pollution Control Board (PCB) in India, which has recently introduced a number of environmental regulations and has considered a range of organisational changes to improve efficiency. However, as we lack evidence on how these changes affect environmental compliance by firms and the decision quality of the regulatory authority, the proposed study will provide important policy-relevant information.


Muhammad Haseeb

University of Bristol

James Fenske

University of Warwick

Namrata Kala

Massachusetts Institute of Technology