Environmental Regulation, Resource Misallocation, and Total Factor Productivity: An Empirical Analysis Based on 284 Cities at the Prefecture-Level and Above in China

Abstract

We investigated the impact of environmental regulation on total factor productivity (TFP) based on a panel dataset of 284 cities at the prefecture-level and above in mainland China from 2006 to 2020 and examined whether environmental regulation had a resource reallocation effect and thus affected TFP. The results showed that there was an “inverted U-shaped” pattern in the impact of environmental regulation on TFP in China and a moderate strengthening of environmental regulation helped to increase TFP, which still held after endogeneity treatment and robustness tests. The “inverted U-shaped” relationship between environmental regulation and TFP in eastern, central, and western cities still held, while environmental regulation did not produce significant effects on TFP in the northeast. The effect of environmental regulation on TFP in large, medium, and small cities tested in groups by city size was consistent with the full sample findings, but the effects decreased in a gradient with city size. The analysis of the impact mechanism showed that environmental regulation had a suppressive effect on resource misallocation and could generate a positive resource reallocation effect and enhance city TFP. The labor reallocation effect of environmental regulation for TFP was stronger than the capital reallocation effect. The findings of our study are of policy reference value for optimizing resource allocation through environmental regulation and thus promoting high-quality city development in China.