Due to the lack of convincing empirical evidence on the costs and benefits of environmental regulation, debates about the future direction of environmental policy are often based on conjecture and hyperbole. The first objective of the project is to inform the debate by using pollution categories established by the EPA after the 1977 Clean Air Act Amendment to quantify some of the direct costs and benefits of primary air pollution regulation. Specifically, the EPA assigned each county either attainment or non attainment status for four criteria pollutants if the national ambient air quality standards were met or not met, respectively. Firms in non attainment counties faced greater regulatory oversight than those designated as attainment. This division of counties sets up an interesting quasi experiment for measuring some of the direct effects of regulation. In principle, it is possible to identify the impact of regulation by comparing changes in outcomes in non attainment and attainment counties. To estimate the costs of regulation, the investigators will examine the effect of attainment/non attainment status on total employment, wages of production workers, and capital stock. To measure the benefits of regulation, the investigators will focus on the impact of county level attainment status on county level air quality, rates of morbidity and mortality related to air pollution, and property values. One result of the analysis is that it will be possible to calculate the trade off between the costs of regulation borne by workers and the benefits received in the form of better air quality and health. The second objective is to provide empirical evidence on some of the indirect effects of regulation by analyzing two theoretical firm level investment behaviors and their responses to regulation. Increased regulation may have distorted the investment decisions of firms through two indirect channels by: 1) increasing uncertainty about the return to a project, and 2) providing incentives for certain firms to invest strategically to gain an economic advantage. The investigators will evaluate the size of the first effect by developing a plant level index of regulatory uncertainty and comparing investment patterns across plants before and after the regulatory regime shift. The analysis will investigate the second effect by developing an index of increased regulatory pressure faced by each firm and comparing changes in investment after the regulatory shift across more and less competitive industries. The research will contribute to the established literature in a number of ways. First, it will use cutting edge econometric methods and a variety of unique and comprehensive establishment level and county level data sets to provide new empirical evidence on the direct benefits and costs of regulation. It will also evaluate the potential indirect effects of regulation on firm investment behavior. In the process, it will identify two theoretical investment behaviors that have not previously been documented empirically and measure some of the indirect costs of regulation. The results should provide guidance on the optimal design of policy.
