The effects of environmental regulations on performance of firms with heterogeneous resilience

Abstract This study explores the impacts of environmental regulations on performance of heterogeneous firms through both theoretical modelling and empirical analysis. It further examines the role of firm resilience in moderating these impacts. We develop a dynamic general equilibrium model predicting that a stricter environmental regulation increases firm exit and raises labour employment, production, and revenue among surviving firms, and boosts profits only for highly productive survivors. The magnitudes of these effects are governed by firm resilience, measured by their financial constraint. Empirically, we analyze a quasi‐natural experiment based on the implementation of a stricter wastewater discharge standard in China's textile printing and dyeing industry. The empirical findings generally support our theoretical predictions.