Prices, Investment and Energy Efficiency: Evidence from China’s Industrial Firms

By incorporating energy-saving through both technology-embodied investment and embodied investment-specific technical change, as well as disembodied factor-neutral technical change into a dynamic stochastic general equilibrium (DSGE) model with heterogeneous investment, this paper deepens our understanding of the avenues through which firms adjust to rising energy prices. Using Chinese firm-level data from 1997-2004, we estimate a set of stylized facts regarding how firms of various ownership types respond to energy price changes. Through indirect inference, we then use these stylized facts to recover the key parameters in the DSGE model. The results show that within Chinese industry, in response to rising energy prices, state-owned enterprises, domestic non-state enterprises, and foreign-funded enterprises employ significantly different means to achieve their energy efficiency. Such differences can be substantially explained by government policy affecting energy pricing and the cost of investment finance across firms of different ownership types.