Regulatory Arbitrage by Governments and Land Conveyance

The pollution haven hypothesis argues that polluting firms strategically respond to the imbalance in environmental regulations; and yet the role of local governments in facilitating the reallocation of polluting activities has not been examined. This study investigates the impact of local government’s strategical response induced by geographically imbalanced regulations on industrial land conveyance to polluting industries in China. Following the Clean Air Action 2013, counties bordering regions with stricter air pollution regulations conveyed more land to polluting industries than those that do not. In bordering counties, land conveyance prices were strategically manipulated, indicating that the increase in land allocation was driven by deliberate price reductions by local governments to attract polluting activities. The effect was more pronounced in counties with lower environmental attention and higher political ambitions among officials. Lastly, deliberate creation of pollution haven led to enhanced economic growth and exacerbated air pollution. These findings underscore the urgent need for coordinated policy efforts to address the unintended consequences of environmental regulation imbalances, thereby emphasizing the importance of the issue to the audience.