Environmental Regulation, The Shadow Economy And Environmental Pollution

As the environmental pollution problem become more serious in China, how to effectively control the pollution is an issue about environmental regulation efficiency. Whereas a mass of research about the effectiveness of environmental regulation in the past focus on the enterprise level, and ignore the existence of shadow economy, this paper persuades that it is necessary to take the influence the shadow economy into consideration if the government intend to improve the environmental regulation performance and enhance the environment quality.This article gets data of the shadow economy of China through a MIMIC model, by using the government regulation, indirect taxes burden and unemployment as causes, and taking the real GDP growth rate and labor participation rate increment as indicators. Followed, this article firstly builds a theoretical framework of the relationship between environment regulation, the shadow economy and the environment pollution, and then estimates the stepwise regression models with interacting variables, structured from the framework, by using the fixed effects model with Driscoll&Kraay standard error working on a panel data of30provinces of China from1998-2012.This paper comes out four main conclusions:(1) the national average size of shadow economy during1998-2012is about11.14%to15.37%, and presents us the slow rise trend.(2) Strengthen environmental regulation will reduce the pollution directly, but increase it through the Shadow economy, and has a positive influence on the whole.(3)The relationship between the shadow economy scale and environmental pollution is nonlinear. Ascension of the capital intensity of the shadow economy will seriously deteriorating the pollution.(4) Strengthen Environmental regulation will significantly worsen the environment by influencing the shadow capital-intensive sectors.