When Do Firms Shift Production Across States to Avoid Environmental Regulation?

Abstract

This paper tests the impact of state environmental regulatory stringency on firms’ allocation of production across states, using plant-level Census data for the paper industry during 1967-2012. We model the firms’ production shares in each state with a conditional logit specification, testing several measures of state regulatory stringency and controlling for other state characteristics. Firms with relatively low compliance rates are more likely to avoid stringent states, compared to firms with the highest compliance rates. This is consistent in our theoretical model when firms’ compliance decisions are affected more by differences across their costs (rather than their benefits) of compliance.