Examining the Evidence on Environmental Regulations and Industry Location

Abstract

This article offers a review and critique of the large literature on the pollution havens hypothesis. This hypothesis refers to the notion that certain jurisdictions can become pollution havens as dirty industries relocate or expand in response to differences in regulatory stringency. The early literature, based on cross-sectional analyses, typically concludes that environmental regulations have an insignificant effect on firm location decisions. However, recent studies that use panel data to control for unobserved heterogeneity, or instruments to control for endogeneity, find statistically significant pollution haven effects of reasonable magnitude. Furthermore, this distinction appears regardless of whether the studies look across countries, states, counties, or industries, or whether they examine plant locations, investment, or international trade patterns.