This project involves two empirical studies of plant and firm production behavior. The first explores the production impacts of environmental regulation on large segments of the U.S. economy. It uses factory-level data from the Census of Manufactures to study several effects of pollution abatement costs imposed by the Clean Air Act Amendments (CAAA). The second study investigates why demand for the products of young plants (factories) is so small and slow-growing relative to that of older plants in the same industry. The project uses rarely available data on plants' physical quantities and prices for producers of 11 homogeneous manufactured goods to separately measure these demand- and supply-side fundamentals.
The investigation of environmental regulation's influence on production studies impacts on plant size, entry and exit, and productivity. It extends earlier work on the topic in terms of both depth and scope. It accounts explicitly for the interrelatedness of plant-level outcomes as well as interactions between regulatory effects and pre-existing differences across plants. Further, while much research in this area has involved case studies of a few industries or a small geographic area, this project looks at the entire U.S. manufacturing sector (the source of a very large share of the polluting activity regulated by the CAAA). The research delivers sharply identified measurements of the sometimes costly consequences of regulation, including costs of producer exits and productivity losses among survivors. These are often missed in 'engineering cost' estimates of regulation.
Knowing the full costs of environmental regulations is necessary to determine optimal regulatory policy, as they are balanced against the often substantial gains of reduced pollution. Characterizing the nature and size of these full costs can inform not only CAAA policy per se, but other environmental regulatory actions as well. The recent policy debates about global warming, given the scale of some of the proposed remedies, emphasize this point.
The study of new plants' slow demand growth digs into specific explanations for the widely noted fact that new plants are so much smaller than older ones. Differences in productivity/costs have been proposed as an explanation in earlier work, but the study shows this is not the case: new plants' productivity levels are just as high as older plants'?. Instead, the explanation appears to lie in slow-acting demand dynamics (customer base growth or reputation building, for example). The uncertainties tied to these processes cause firms to wait to expand new plants until further information is known about demand. These dynamic demand factors are quantified using a model of plant growth that explicitly accounts for, and helps identify, the intertemporal links that create the observed inertia-laden demand growth paths.
Knowing why new plants look so much different than older plants despite selling what are very similar products can guide small business policy. Many of the new plants that will be studied are owned by firms under the purview of the U.S. Small Business Administration. These findings can supplement that agency's ongoing research program.
