Teaching an old dog new tricks: Firm learning from environmental regulation

We examine a new mechanism by which environmental regulation can increase efficiency: intra-firm knowledge spillovers due to environmental regulation. County-level non-attainment of the National Ambient Air Quality Standards creates spatial variation in the degree of regulatory stringency, as states impose stronger environmental regulation in non-attainment counties. We use this spatial variation to examine how the efficiency of electricity generators responds to increases in regulation. We show that, in response to increased regulatory stringency, electricity generators find technical efficiency enhancements and then transfer these enhancements to other units within their fleet. We find that a change in regulatory stringency translates to within-firm spillovers of 3–4%, and that these gains occur at least 3years after the increase in regulatory stringency. •We examine the relationship between environmental regulation and firm efficiency.•We find that changes in regulatory status increases efficiency by 2–4%.•We find that changes in regulatory status creates efficiency spillovers of 3–4%.•Efficiency spillovers are likely the product of is intra-firm knowledge transfers.•Those spillovers lag regulatory effects by 1 to 2years.