Firm Relocation as Environmental Policy: Measurement, and Impacts on Agglomeration and the Environment

This project leverages a policy which relocated nearly 30,000 firms operating in Delhi to industrial areas outside the city, and did so randomly, between 2000-2016. Due to a shortage of industrial plots in the industrial areas when the policy began, allotment of these plots was done via a series of lotteries spanning 2000 through 2011. These lotteries provide a unique opportunity to study how the presence (or absence) of industrial activity affects the environment, workers, as well as firms with linkages to the relocated firms. The researcher’s broad goal is to characterise trade-offs between environmental policy goals (chiefly pollution reduction in high population density areas) and firm outcomes related to agglomeration. Specifically, they aim to answer how the timing of relocation and the characteristics of firms’ assigned plots (including industry of neighbours, proximity to labour of various skill levels, and proximity of infrastructure) influence their economic performance as measured by productivity, scale, and profitability?  

To address this question, the researchers will conduct a firm survey on the effects of being made to relocate to particular plots and at particular times at random. The goal of the surveys is to measure  productivity and networks within the allocated industrial area. This evidence will allow the researchers to both quantify agglomeration and congestion that occurs in the industrial area, as well as identify mechanisms driving both forces (for instance, communication about inputs, information sharing about labour etc.). These outcomes will be measured using the firm survey which will include modules on management practices, supply chain linkages, inputs, and outputs, including revenues and costs.

Given the importance of understanding the trade-offs between environmental policies and economic growth, this project will provide crucial information on how firms and their activities are affected by the implementation of environmental policies. This project will also expand literature on agglomeration as the context of this research provides a unique case of experimental variation, which differs from most agglomeration literature that is either quasi-experimental or structural. The context of the project will allow the researchers to examine variation by industry and input-output relationships in the magnitude of agglomeration benefits as measured by concomitant increases in scale and willingness to bear relocation costs.  



Michael Gechter

Penn State University

Namrata Kala

Massachusetts Institute of Technology