Collaborative Research: Pollution Mitigation and Productivity in Developing Countries

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The economies of many developing countries have experienced huge transformations over the past 20 years, but a major cost of development has been air and water pollution. The fact that pollution remains a central problem suggests that it may be very costly to mitigate pollution, in terms of lost productivity and revenues. An opposing view is the "Porter hypothesis" that postulates that environmental policies lead to greater productivity. The current empirical evidence on these tradeoffs is both limited and ambiguous, with some studies finding a substantial productivity cost of pollution mitigation and others finding evidence in favor of the Porter hypothesis. This research conducts a detailed empirical evaluation of whether policies in developing countries to lower pollution have been successful. The investigators also quantify the productivity and distributional costs of these policies. This research investigates these questions for both the manufacturing and power generation sectors. This research makes a significant contribution to intellectual merit, through its use of novel data, its innovative identification, and its use of frontier methods. This research is among the first to combine firm-level panel datasets on industrial production, power plant investment in environmental mitigation technologies, and air and water pollution discharges, in developing or developed countries. The investigators develop new sources of identification to understand pollution in developing countries by focusing on panel variation in environmental discharge fees and pollution reduction mandates. Using the detailed data, the investigators also evaluate whether pollution mitigation policies cause firms to invest in new mitigation technologies or simply reduce their output.This award reflects NSF's statutory mission and has been deemed worthy of support through evaluation using the Foundation's intellectual merit and broader impacts review criteria.