The impact of environmental regulations on enterprise production

As an integral part of the modern environmental governance system, environmental regulations have the potential to alter the dynamics of competition and cooperation, resulting in a phenomenon known as the “relatively better” effect. In light of this phenomenon, we have developed a static game model based on incomplete information to analyze its implications. Through the exploration of Nash equilibrium, we have discovered that the "relatively better" effect allows environmentally regulated clean enterprises to transfer a portion of their costs to polluting enterprises. Consequently, clean enterprises experience lower financing costs compared to their polluting counterparts under environmental regulation conditions. This conclusion is supported by empirical analysis conducted using Chinese enterprise data. Furthermore, our research reveals that appropriately designed environmental regulations, including the intensity of regulation and the establishment of emission rights trading systems, can contribute to improving social distribution.