Industrial regulations are typically designed with a particular policy objective and set of rms in mind. When input-output linkages connect rms across sectors, such "piecemeal" regulations may worsen externalities elsewhere in the economy. Using daily administrative and survey data, we show that in Peru's industrial shing sector, the world's largest, air pollution from downstream (shmeal) manufacturing plants caused 55,000 additional respiratory hospital admissions per year as a consequence of the introduction of individual property rights (over fish) upstream. By removing suppliers' incentive to "race" for the resource and enabling market share to move from inecient to ecient rms, the reform spread production out across time, as predicted by a conceptual framework of vertically connected sectors. We show that longer periods of moderate air polluting production are worse for health than shorter periods of higher intensity exposure. Our ndings demonstrate the risks of piecemeal regulatory design in interlinked economies.
Hansman, Chris, Jonas Hjort, and Gianmarco Leon. "Interlinked Firms and the Consequences of Piecemeal Regulation." Columbia Business School, October 14, 2016.
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