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Working Paper

Can decentralisation be a force for bad? New evidence from decentralising environmental clearances in India

Authors:

Eddy Zou ,

London School of Economics and Political Science, GB
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Brooklyn Han,

London School of Economics and Political Science, GB
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Chloe Chong,

London School of Economics and Political Science, GB
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Visheshika Baheti,

London School of Economics and Political Science, GB
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Naomi Sandars

London School of Economics and Political Science, GB
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Abstract

We exploit India’s 2006 reform of Environmental Impact Assessment (EIA) regula- tions to assess whether decentralising environmental regulations improve firms’ pollution abatement behaviours and their impacts on firm performance. Using a nationally representative panel of registered manufacturing firms from 2002 to 2018, we exploit temporal and spatial variation using a difference-in-differences strategy to estimate impacts of decentralisation at the firm, industry-state, and district levels. We then explore heterogeneous effects of decentralisation by regulatory stringency, prior regulatory compliance, and construction of local regulatory authorities at the state level. For formal sector firms, we find decentralisation reduced incentives to install pollution control machineries, led to large and persistent reductions in investments and employment, but also reduced fuel intensity. We further examine spillover effects of decentralisation on unregistered firms in the informal sector, finding that districts more exposed to decentralisation saw faster informal sector employment and output growth. Overall, these results suggest India’s decentralisation of environmental clearance was not effective at improving firm pollution control and brought economic costs.
How to Cite: Zou, E., Han, B., Chong, C., Baheti, V. and Sandars, N., 2021. Can decentralisation be a force for bad? New evidence from decentralising environmental clearances in India. Rationale, 1, pp.125–184.
Published on 12 Sep 2021.

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