Preliminary Results Not for Quotation Do Firms Avoid Environmental Regulation by Shifting Production?

This paper examines the relationship between a firm's allocation of production across its plants and the environmental stringency faced by those plants. State environmental agencies have sizable discretion within the U.S. regulatory structure, allocating air pollution cleanup across plants, administering permits for water pollution, and performing most air and water pollution inspections. If differences across states in regulatory stringency are large enough, firms could respond by shifting production away from strict states. Most prior research has focussed on the location of new plants, while our production allocation measure includes new plant openings, plant closings, and changing production at existing plants. We use plant-level information from the U.S. Census Bureau's Longitudinal Research Database (LRD) for large, multi-plant firms to measure what share of each firm's production takes place in each state. These production shares form the dependent variable, covering the 1967 to 1992 period at five-year intervals. A variety of measures of state environmental stringency are examined, including congressional voting patterns, pollution abatement spending, stringency of state laws, and enforcement activity in the state. We also measure each firm's compliance rate (based on plant-level compliance with regulatory requirement). We find a significant relationship between our regulatory variables and the production allocation within the paper industry. States with stricter regulations have smaller production shares, even after controlling for a variety of other state characteristics. This impact is concentrated on firms that are out of compliance with regulation. Firms with high compliance rates seem to be less sensitive to regulation, and may even have slightly larger production shares in stricter states. These results suggest that differences across firms in compliance are driven primarily by differences in compliance costs (economies of scale in compliance), rather than by differences in the benefits of compliance (maintaining the firm's reputation with customers and regulators). Our results are weaker for the oil industry, perhaps reflecting a more local market for oil, with less opportunity to shift production across states. It may also reflect real differences in the impact of regulation, with oil refineries being less affected than paper mills. Our results are also weaker, for both oil and paper, when we examine changes in production shares over time. These differences across industries and across model specifications, suggest some caution in interpreting our results.