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<p>Does spatial heterogeneity in environmental enforcement simply shift pollution elsewhere? This paper investigates the unintended consequences of public supervision regulation. Using comprehensive firm-level data and a difference-in-differences design, we document a significant “pollution leakage” effect: Firms in high-regulation cities shift their emissions strategically to their affiliates in low-regulation cities within the same conglomerate rather than improving their emission efficiency. We show that this reallocation is driven by shifting production to affiliates that share similar business functions, possess excess capacity, and operate at lower costs. Overall, although firms in high-regulation reduce local emissions, the aggregate emissions of the affected conglomerates do not decrease, undermining the effectiveness of the policy. Our findings underscore the hidden costs of regulatory fragmentation, in which internal corporate networks serve as a channel for circumventing stringent regulations.</p>

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The Unintended Consequences of Environmental Regulation on the Environment: Evidence from Within-Conglomerate Pollution Reallocation

  • 期刊论文

  • 发表日期：

    2026年3月27日

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  • Ken Cheng,
  • Tianli Chi

摘要

Does spatial heterogeneity in environmental enforcement simply shift pollution elsewhere? This paper investigates the unintended consequences of public supervision regulation. Using comprehensive firm-level data and a difference-in-differences design, we document a significant “pollution leakage” effect: Firms in high-regulation cities shift their emissions strategically to their affiliates in low-regulation cities within the same conglomerate rather than improving their emission efficiency. We show that this reallocation is driven by shifting production to affiliates that share similar business functions, possess excess capacity, and operate at lower costs. Overall, although firms in high-regulation reduce local emissions, the aggregate emissions of the affected conglomerates do not decrease, undermining the effectiveness of the policy. Our findings underscore the hidden costs of regulatory fragmentation, in which internal corporate networks serve as a channel for circumventing stringent regulations.