The Centralization of Environmental Regulation and Firm Productivity: Evidence from the Vertical Reform of Environmental Protection Agencies

This study examines the effects of centralized environmental regulation enforcement on firm productivity. Exploiting China’s vertical reform of environmental protection agencies (VREA) and using a difference-in-differences approach, we find that the centralization of environmental regulation enforcement via the implementation of VREA significantly enhances firms’ total factor productivity. Specifically, the centralization of environmental regulation enforcement strengthens environmental regulation across government levels, thereby encouraging firms to increase R&D investments and improve technological efficiency. Further analyses reveal that the positive effect of centralized environmental regulation enforcement is more pronounced in non-state-owned enterprises with higher bargaining power, more competitive industrial structures, and lower financing constraints. Overall, our results present novel evidence on the important role of centralized environmental regulation enforcement in achieving environmental protection and promoting productivity, highlighting the potential for regulatory frameworks to support sustainable economic growth.