Chilling Effect of Strengthened Rule of Law: Environmental Court and Entrepreneurship

Abstract

We investigate the causal effect of environmental courts on entrepreneurship in China. Using the establishment of environmental courts as a quasi-experiment and employing a staggered difference-indifferences specification, we find that environmental courts have a chilling effect on entrepreneurship. Specifically, the number of new firms and new firms per 10,000 people decrease by approximately 10.51% and 10.33%, respectively. This effect is particularly pronounced in high polluted regions and heavy pollution industries. We further provide evidence that enhanced judicial efficiency, stricter enforcement, higher compliance costs, and reduced bank loans serve as potential mechanisms. Finally, we find that environmental courts can also reduce industrial pollution and improve air quality. Our findings highlight the unintended economic costs of strengthening environmental rule of law, underscoring the need to balance environmental regulation with economic development.

Keywords: Environmental court, Entrepreneurship, Rule of law, Chilling effect, China

JEL Classification: K32, M13, Q52, Q58