Who invest more in advanced abatement technology: theory and evidence

Abstract

We study firm investment in abatement technology under a heterogeneous firm framework and find that abatement technology investment increases (decreases) as firm productivity increases if investment and productivity are complements (substitutes). Under linear demand, firms' abatement investments exhibit an inverted-U shape with respect to firms' productivity, which is in contrast to results in existing studies. In response to tightened environmental regulations, more-productive firms raise their respective investments in abatement technology, whereas less-productive firms do the opposite; Pollution emission intensity of a firm decreases with productivity level. The key theoretical predictions are confirmed by empirical tests using Chinese data.