Water rights trading and corporate productivity: Evidence from a quasi‐natural experiment of China's pilot policy

The economic consequences of water efficiency that results from water policies remains controversial. Studies on how water rights trading (WRT), which allocates water resources in and across industries, influences corporate efficiency can reveal the behavioral response of market participants to increase water efficiency. Considering the WRT pilot implemented in 2014 as a quasi‐natural experiment, we adopt the difference‐in‐difference‐in‐differences method to evaluate its impact on corporate total factor productivity (TFP). Our findings show that WRT significantly stimulates the TFP of firms with high water costs. This effect is achieved by promoting water‐related green innovation and optimizing resource allocation instead of alleviating corporate risks. Furthermore, the impact of WRT is more pronounced in areas with lower levels of water endowment and market development. The research findings have strikingly important policy implications regarding water management in China through WRT.