Pollution reduction by rationalization hypothesis and water pollution in China

This paper empirically investigates pollution reduction by rationalization hypothesis in China. We study the heterogeneous firm’s export effect on water pollution in China. We use China’s firm-level data from 2000 to 2012 to estimate the firm’s heterogeneity of export effect, composition effect, and technique effect on water pollution. We find that intra-industry agglomeration produces a competition effect, and more productive firms can export with less polluted water. More productive firms can export with less polluted water by reallocating more productive labor from dirty firms. We find an inverted U-shaped relationship between a firm’s productivity and water pollution. Intra-industry agglomeration drives up labor productivity; higher productive firms export while producing more polluted water initially. When a firm’s productivity is increasing, export activity produces less polluted water. More export induces less water pollution for high productivity firms. We conclude that the mechanism of pollution reduction by rationalization hypothesis does exist for water pollution in China. Trade liberalization causes some firms to become cleaner, even though we observe relatively clean exporting firms and relatively dirty domestic producers at different productivity stages. Productivity-induced rationalization causes water pollution to fall with high firm productivity. Water pollution in different regions has disparities. Eastern area in China is more likely to produce more polluted water than the rest of China.