The impact of environmental regulations on enterprise production and financing costs: a production game approach

Environmental regulation is a crucial policy tool in modern environmental governance, shaping firm competition. One significant, yet underexplored, consequence is the “relatively better” effect, where regulatory policies create asymmetric cost burdens between clean and polluting enterprises. To formally analyze this phenomenon, we construct a static game model with incomplete information and derive the Nash equilibrium, demonstrating that environmental regulations enable clean enterprises to partially transfer compliance costs to polluting firms, leading to lower financing costs for clean firms. This theoretical prediction is empirically validated using Chinese firm-level data, confirming the differentiated financial burdens imposed by environmental policies. The result shows that the magnitude of the “relatively better” effect depends on factors, such as the design of emission trading markets, regulatory enforcement stringency, and firms’ technological adaptability. By integrating theoretical modeling, and empirical analysis, we offer a comprehensive framework for understanding the financial and strategic implications of environmental regulations on firms.