Abstract
Porter (1991) and follow-up scholars hypothesize that environmental regulation stimulates innovation to promote performance. As a complement to the existing literature, this paper reveals an ironic reality: performance-friendly regulation as a proxy for the “win–win” solution of environmental regulation is an illusion due to ineffective intensity for sustainability. With firm-level evidence from China, we measure the intensity of environmental regulation by a firm's investments for environmental protection (IEP) or fees for environmental protection (FEP). After identifying a positive causal effect on performance of IEP or FEP, we document that IEP and FEP are complementary and thus ineffective for sustainable development. We further document that the effects between IEP and FEP are mediated by performance insignificantly from an economic perspective, thereby revealing the incentive incompatibility of a firm in IEP and FEP.
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