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This paper uses the spatial Durbin model to capture horizontal strategic environmental policymaking and their effects on air polluting industrial agglomeration in Chinese prefectures. Using a set of panel data on 276 prefectures from 2003 to 2009 in China, we found strong evidence in favor of the pollution haven hypothesis in China. Moreover, we observed evident spillover effects in environmental regulations at the provincial level but not at the prefectural level. Air polluting industries transferred to their neighbored provinces to avoid harsh environmental regulations when the environmental regulatory stringency of the own province was enhanced. Exploring the heterogeneous impacts of EPAs on air polluting industrial activities, we found that senior EPA staff and those working in higher EPA ranks and Environmental Monitoring Stations played a superior role in implementing environmental regulations. The results are robust to alternative spatial weights, different agglomeration indexes, and the SLX model using the ventilation coefficient as an instrumental variable.

Industrial agglomeration and the pollution haven hypothesis: evidence from Chinese prefectures