Elsevier, Journal of Comparative Economics, Volume 45, 1 February 2017
This paper provides a systematic study of the location choice of new polluting firms driven by the 11th Five-Year Plan's water pollution reduction mandates in China. We explore a unique dataset of environmental statistics, which contains 31380 polluting manufacturing firms newly established in the period 2006–2010. Our conditional logit model provides strong evidence for the changes of new polluting firms’ location choice from the coastal provinces, which have strict environmental mandates, to the western provinces, which have lax environmental mandates, and demonstrates the distinct location patterns of heterogeneous polluting firms. While foreign polluting firms were generally driven by the mandates, domestic polluting firms were more resistant and were driven to the western provinces only after 2007. As a result, the potential pollution transfer would threaten the more fragile water environments and public health in western provinces. We thus posit a perverse incentive of current environmental policy and recommend integrated water management as well as close coordination of local governments to improve the efficacy of environmental regulation in China.