Global Policy Spillovers: How Environmental Policies Propagate through Product Attributes
by Koichiro Ito, James M. Sallee, and Andrew Smith
How should policymakers evaluate policy impacts when firms design products for global markets? Standard economic analyses typically focus on domestic outcomes, implicitly assuming that policies affect only the jurisdiction in which they are enacted. Yet multinational firms often harmonize product design across markets, creating the potential for policies implemented in one country to generate global spillovers through changes in product attributes. We call this phenomenon “attribute propagation” and develop a framework to measure and assess its quantitative importance. Applying this framework to an environmental policy affecting automobiles, we find that a fuel-economy subsidy in Japan led to significant improvements in the fuel economy of vehicles sold in the United States. We then develop a model of multinational automobile markets featuring cross-market cost complementarity as a key mechanism driving attribute propagation. Using the estimated model, we conduct counterfactual simulations to quantify environmental benefits accounting for the policy’s global spillover effects. We find that global spillover effects are first-order—a majority of the CO2 emissions reductions induced by the Japanese policy arise through its impact on the U.S. automobile market. These findings suggest that standard economic analyses that abstract from attribute propagation can substantially understate the full policy impact. More broadly, attribute propagation provides a new lens for evaluating environmental, safety, antitrust, and technology policies in a global economy.
View Working Paper View Research Highlights
Campaigning for Extinction: Eradication of Sparrows and the Great Famine in China
by Eyal G. Frank, Qinyun Wang, Shaoda Wang, Xuebin Wang, Yang You
How do large disruptions to ecosystems affect human well-being? This paper tests the long-standing hypothesis that China’s 1958 Four Pests Campaign, which exterminated sparrows despite scientists’ warnings about their pest-control role, exacerbated the Great Famine—the largest in human history. Combining newly digitized data on historical agricultural productivity in China with habitat suitability modeling methods in ecology, we find that, after sparrow eradication, a one-standard-deviation increase in sparrow suitability led to 5.3% larger rice and 8.7% larger wheat declines. State food procurement exacerbated these losses, resulting in a 9.6% higher mortality in high-suitability counties—implying nearly two million excess deaths.
View Working Paper View Research Highlights
Can Technology Solve the Principal-Agent Problem? Evidence from China’s War on Air Pollution
We examine the introduction of automatic air pollution monitoring, which is a central feature of China’s “war on pollution.” Exploiting 654 regression discontinuity designs based on city-level variation in the day that monitoring was automated, we find that reported PM10 concentrations increased by 35% immediately post–automation and were sustained. City-level variation in underreporting is negatively correlated with income per capita and positively correlated with true pre-automation PM10 concentrations. Further, automation’s introduction increased online searches for face masks and air filters, suggesting that the biased and imperfect pre-automation information imposed welfare costs by leading to suboptimal purchases of protective goods.
Winter Heating, Air Pollution, and Acute Health Impact: Evidence from a Regression Discontinuity Design
China’s coal-fired central heating systems generate large amounts of hazardous emissions and significantly deteriorate air quality. In a regression discontinuity design based on the starting dates of winter heating, we estimate the acute health impacts of winter heating and air pollution. We find that a 10-point increase in the weekly Air Quality Index will cause a 4% increase in mortality. People in poor and rural areas are particularly vulnerable to this sudden air quality deterioration, suggesting that the health impacts of air pollution can be mitigated by better socio-economic conditions. Exploratory cost-benefit analysis suggests that replacing coal with natural gas for heating can improve social welfare.
Expressways, GDP, and the Environment: A Case of China
In a matched difference-in-differences setting, we show that China’s expressway expansion helps poor rural counties grow faster in GDP while slowing the rich rural counties down. This heterogeneity is not driven by factors about initial market access, factor endowments, or sectoral patterns; however, it is consistent with the Chinese government’s development strategy that relatively more developed regions prioritize environmental quality over economic growth, while poor regions pursue the opposite. We document that expressway connection indeed makes poor counties adopt dirtier technologies, host more polluting firms, and emit more pollutions, contrary to what happens to the rich connected counties. These results imply that recognizing the GDP–environment trade-off can help understand the full implications of infrastructure investment and other development initiatives.
A Forensic Examination of China’s National Accounts
China’s national accounts are based on data collected by local governments. However, since local governments are rewarded for meeting growth and investment targets, they have an incentive to skew local statistics. China’s National Bureau of Statistics (NBS) adjusts the data provided by local governments to calculate GDP at the national level. The adjustments made by the NBS average 5% of GDP since the mid-2000s. On the production side, the discrepancy between local and aggregate GDP is entirely driven by the gap between local and national estimates of industrial output. On the expenditure side, the gap is in investment. Local statistics increasingly misrepresent the true numbers after 2008, but there was no corresponding change in the adjustment made by the NBS. Using publicly available data, we provide revised estimates of local and national GDP by re-estimating output of industrial, construction, wholesale and retail firms using data on value-added taxes. We also use several local economic indicators that are less likely to be manipulated by local governments to estimate local and aggregate GDP. The estimates also suggest that the adjustments by the NBS were insufficient after 2008. Relative to the official numbers, we estimate that GDP growth from 2010-2016 is 1.8 percentage points lower and the investment and savings rate in 2016 is 7 percentage points lower.
Leveraging Political Incentives for Environmental Regulation: Evidence from Chinese Manufacturing Firms
This paper estimates the effect of environmental regulation on firm productivity using a spatial regression discontinuity design implicit in China’s water quality monitoring system. Because water quality readings are important for political evaluations, and the monitoring stations only capture emissions from their upstream regions, local government officials are incentivized to enforce tighter environmental standards on firms immediately upstream of a monitoring station, rather than those immediately downstream. Exploiting this discontinuity in regulation stringency with novel firm-level geocoded emission and production datasets, we find that upstream polluting firms face a 27% reduction in Total Factor Productivity (TFP), and a 48% reduction in emission intensity, as compared to their downstream counterparts. We find that the discontinuity in TFP does not exist in non-polluting industries, only emerged after the government explicitly linked political promotion to water quality readings, and was entirely driven by prefecture cities with career-driven leaders. Linking the TFP estimate with the emission estimate, a back of the envelope calculation indicates that China’s current water-pollution abatement target leads to an annual economic loss of more than 30 billion dollars.
Award: Gregory Chow Best Paper Award, Chinese Economists Society, 2018