Unintended environmental consequences of place-based economic policies

We examine the environmental consequences of two regional economic development (RED) policies that aimed to develop the economy of the relatively underdeveloped upper Pearl River (UPR) regions in Guangdong Province, China. Applying the triple-difference analysis to annual county-industry-level data, we find that the two RED policies caused higher growth in industries with high water pollution than in industries with less water pollution in the UPR regions. The second RED policy with environmental regulations was effective in restraining the new entry of firms in high-pollution industries into the UPR regions but failed to drive existing high-pollution firms out of the UPR regions. Firms' location decisions were driven by the more favorable tax regimes and less stringent pollution regulations in the UPR regions.