Regulatory policy and misallocation: A new perspective based on the productivity effect of cleaner production standards in China's energy firms

Highlights: • Regulatory policy can impact two different levels of total factor productivity. • Policy may improve the observed productivity but reduce the potential productivity. • Cleaner production standards have positive effects on productivity in energy firms. Based on a theoretical model, this study reveals that regulatory policy can impact two different types of total factor productivity (TFP) at both the firm and industry levels, namely the true/distorted TFP, calculated by the observed and distorted data, and the counterfactual/undistorted TFP, after correcting distortions. Then, using the difference-in-differences method, we investigate the impact of cleaner production standards on Chinese energy firms' TFP and resource allocation efficiency over the period of 2000–2007. The empirical results show that when resources are fully and effectively allocated, the distorted TFP of China's energy industry can be increased by 117%–491.6%. Although the regulations of cleaner production reduce the efficiency of resource allocation in the energy industry, it enhances two levels of firms' TFP. Heterogeneity analysis shows that these policies have a stronger impact on small and state-owned firms. This study suggests that policy evaluation should combine the changes in two levels of TFP and resource allocation.