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A Spatial Analysis of Regional Growth and Environmental Regulations

C. Nondo, T. Gebremedhin

Abstract


Within a multivariate cross-sectional framework, this paper utilizes a regional growth model to analyze the relationship between environmental regulations (proxied by county attainment status) and regional growth indicators.The model explicitly addresses the reverse causality (or simultaneity problem) and spatial dependence among the variables. After accounting for endogeneity and spatial relations among the variables, empirical results indicate significant causal links between environmental regulations and economic growth.Consistent with theory which suggests that environmental quality is a normal good, we find that an increase in per capita income is positively associated with an increase in environmental regulation stringency. We find evidence that initial conditions of environmental regulation stringency are negatively related to regional growth factors, while the change in environmental regulation stringency is positively related to growth.The findings in this study reinforce the need to design and implement environmental regulations that stimulate economic growth and enhance environmental quality.

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