Leveraging Political Incentives for Environmental Regulation: Evidence from Chinese Manufacturing Firms

Working Paper
Published on 8 October 2019

Abstract

This paper, by He, Wang and Zhang (2019), estimates the effect of environmental regulation on firm productivity usign a spatial regression discontinuity design implicit in China's water quality monitoring system. Because water quality readings are important for political evaluations, and the monitoring stations only capture emissions from their upstream regions, local government officials are incentivized to enforce tighter environmental standards on firms immediately upstream of a monitoring station, rather than those immediately downstream. Exploiting this discontinuity in regulation stringency with novel firm-level geocoded emission and production datasets, the authors find that upstream polluting firms face a 27% reduction in Total Factor Productivity (TFP), and a 48% reduction in emission intensity, as compared to their downstream counterparts. They find that the discontinuity in TFP does not exist in non-polluting industries, only emerged after the government explicitly linked political promotion to water quality readings, and was entirely driven by prefecture cities with career-driven leaders. Linking the TFP estimates with the emission estimate, a back of the envelope calculation indicates that China's current water-pollution abatement target leads to an annual economic loss of more than 30 billion dollars.

Authors

Guojun He

Hong Kong University of Science and Technology

Shaoda Wang

University of California, Berkeley

Bing Zhang

Nanjing University