Lin William Cong, Yuanyu Qu, and Guojun Wang
Review of Finance, Volume 29, Issue 5, September 2025, Pages 1303–1336, https://doi.org/10.1093/rof/rfaf033
Environmental monitoring faces data manipulation issues, undermining protection efforts. Blockchain technology offers a solution with its tamper-proof nature, enhancing data reliability. However, evidence on its real-world socioeconomic impact in environmental regulation remains limited.
Our study addresses this gap by leveraging China’s unique position as a pioneer in implementing blockchain for environmental monitoring while banning cryptocurrencies. This provides a rare setting to isolate blockchain’s core data function. We develop a model of strategic interactions between regulators and polluting firms. Regulators balance local economic benefits against pollution’s social costs and monitoring expenses, while firms maximize utility by choosing violation probabilities and relocating to areas with weaker oversight.
Blockchain adoption slashes verification costs for regulators. This eliminates violations in adopting cities due to near-certain detection. However, it triggers firm relocation to non-adopting cities, reducing local industrial output. Crucially, partial adoption may increase total pollution when cities differ significantly in social costs from undetected violations. Relocated firms pollute more intensely in less regulated areas, potentially outweighing reductions in adopting cities.
Empirical analysis of six Chinese cities shows adoption decisions depend on fiscal capacity (adoption cost proxy), pollution levels (violation cost proxy), and public concern (undetected violation cost proxy). Post-adoption, treated cities saw significant pollution decreases: SO2 (-16.6%), NO2 (-7.9%), CO (-4.6%). However, quarterly GDP growth fell 1.8–2.6%, driven by the contraction of industrial sector.
Firms increased factory openings in non-adopting cities, confirming relocation. While blockchain effectively reduces local emissions, policymakers must weigh these gains against economic costs and the critical risk that partial adoption increases total pollution through relocation and intensified violations elsewhere. Coordinated implementation and better design of the blockchain system are essential for net environmental benefits.