Abstract
We studied how environmental regulation affects the ecological environment from the perspective of an underground economy. The theoretical model shows that environmental regulation exerts both direct and indirect effects — via the underground economy — on environmental pollution, and that the underground economy is unfavorable for the environment. Empirical results show that all the effects (direct, indirect, and total) of environmental regulation are insignificant, and the enforcement of environmental regulation may increase smog emissions with the expansion of the underground economy; smog pollution will increase with the strengthening of environmental regulation. Moreover, the underground economy shows a remarkable spatial effect when using spatial distance or spatial economics weights matrix.
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