Does a designed financial system impact polluting firms’ employment? Evidence of an experimental economic policy

Abstract

By examining both high- and low-polluting firms, this paper uncovers the causal effect of an environmental-protection-related financial policy on the employment of firms. Using extensive dynamic panel data of Chinese manufacturing firms, I employ the difference in differences (DID) method to resolve the endogeneity problem and uncover the identification. My identifications show that high-pollution firms’ employment decreased when the green loan policy was implemented. This is caused by higher financial costs and financial constraints which high pollution firms are challenged with. Furthermore, in this investigation the underlying mechanism for the decrease in employment are analysed. The findings show that the decrease in employment can be attributed to the crowding-out effect of investments in fixed and intangible assets. Finally, this study shows that the green loan policy shock and the resulting decrease in employment has a more severe impact on capital-intensive and high-wage firms.