Regulating Conglomerates in China: Evidence from an Energy Conservation Program

We study a prominent energy regulation affecting large Chinese manufacturers that are part of broader conglomerates. Using detailed firm-level data and difference-in-differences research designs, we show that regulated firms cut output and shifted production to unregulated firms in the same conglomerate instead of improving their energy efficiency. Conglomerate spillovers account for 40% of the output loss of regulated firms and substantially reduce aggregate energy savings. Using a structural model, we show that alternative policies that use public information on business networks could lower the shadow cost of the regulation by more than 40% and increase aggregate energy savings by 10%.