Environmental Regulations, Political Incentives and Local Economic Activities: Evidence from China*
| Published date | 01 June 2021 |
| Author | Shiyu Bo |
| Date | 01 June 2021 |
| DOI | http://doi.org/10.1111/obes.12407 |
812
©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd.
OXFORD BULLETIN OF ECONOMICSAND STATISTICS, 83, 3 (2021) 0305–9049
doi: 10.1111/obes.12407
Environmental Regulations, Political Incentives and
Local EconomicActivities: Evidence from China*
Shiyu Bo†
†Institute for Economic and Social Research, Jinan University, Guangzhou, Guangdong
510632, China (e-mail: boshiyu@outlook.com)
Abstract
How do nationwide environmental regulations produce heterogeneous effects on the eco-
nomic activities of manufacturing firms located in places with differently incentivized city
leaders? This paper answersthis question by drawing on a set of firm-based pollution regu-
lations in China from 2007 to investigate the relationship between political incentives and
the effects of environmental regulations. I show that when a city’s Party secretary has more
incentives to be promoted,the adverse impacts on production by regulated firms tend to in-
crease, but these losses for regulated firms are compensated by gains for other unregulated
firms in polluting industries. Therefore, no overall reduction is seen in the manufacturing
activities of the polluting industries. The findings suggest that if multitask problemsfor lo-
cal governments are properly addressed, environmental regulations can effectively reduce
the pollution and avoid large unintended costs to economic growth.
I. Introduction
Over the past few decades, policies on the environment and pollution have been among the
most frequently debated and highlycontroversial topics in public and academic discussions.
Recent research has concentrated on the environmental and the economic consequences of
regulations such as the Clean AirAct Amendments (CAAA) in the United States, the Clean
Air Act in the United Kingdom and theWater Framework Directivein the European Union.
On the one hand, these regulations have been found to reduce emissions of pollutants
and improve environmental quality. On the other hand, most studies accept that these
regulations are associated with reductions in the manufacturing activities of regulated
firms and industries (Jaffe et al., 1995; Henderson, 1996; Greenstone, 2002; Kahn and
Mansur, 2013; Liu, Shadbegian and Zhang, 2017; 2018; Chen et al., 2018). However,
JEL Classification numbers: O13, Q53, Q58, R11, R58, P25.
*I thank the editors, Professor James Fenske and three anonymous referees, whose comments and suggestions
greatly improve this paper. I am grateful to Robin Burgess for his guidance and support throughout this project. I
benefit from useful suggestions and comments from Zhao Chen, Vernon Henderson, Guy Michaels, Daniel Sturm,
Alan Winters and anonymousreferees. This project was supported by National Natural Science Foundation of China
(No. 71803064), Guangzhou Philosophy and Social Science Planning Grant (No. 2020GZGJ42), the Fundamental
Research Funds for the Central Universities (No: 20JNTZ16) and the 111 project of China (No. B18026). I declare
no conflict of interest.
Regulations and Economic Activities813
regulations can also have general equilibrium effects on other non-directly regulated firms
and industries. Evaluating the costs of unintended consequences on all firms and industries
can enable policy makers to consider the adverse effects of well-intentioned regulations
and to design welfare programmes for affected workers.
This paper uses a set of firm-based environmental regulations in China and comprehen-
sively estimates their intended or unintended economic consequences for different types
of firms. China has witnessed a fast-growing economy, but at the same time, emerging
environmental damage has brought great losses. Therefore, the Chinese government faces
a multitask problem of balancing the goals of economic growth and dealing with envi-
ronmental issues (Chen et al., 2018). The efforts that the government exerts to deal with
environmental issues have included several regulations to control pollution. The regula-
tions in question here have targeted firms that account for 65% of the emissions of sulphur
dioxide, smoke and industrial dust. These firms are called National Specially Monitored
Firms. The central government has imposed much stricter quotas on these firms and it has
required that they be monitored more carefully and more often. This policy is regarded as
effective for reducing the pollutant emissions (Zhang, Chen and Guo, 2018), as it combines
many useful regulatory tools. For example, more frequent inspections make it harder for
the manufacturing enterprises to hide their pollution (Lin, 2013) and automatic air pollu-
tion monitoring help to solve underreporting issues by local officials (Greenstone et al.,
2020).
I link the list of these primary polluting firms with a variety of datasets and use a triple-
differences strategy to identify the effects of the 2007 regulations.The main empirical
findings are that in cities with highly incentivized local leaders, the regulations suppress
production by the regulated firms and promote production by unregulated firms. However,
these spillover effects are weaker in cities with poorly incentivized leaders. These results
suggest that the highly incentivized local leaders are inclined to transfer the problem of
unemployment in polluting industries from the regulated firms to the unregulated firms. At
the same time, the emission of air pollutants is reduced following the regulations.
I use the plausibly exogenous variations in local officials’ ages to empirically iden-
tify the officials’ incentives for promotion. The rationale for this method is based on the
regulations regarding the compulsory age of retirement and the minimum tenure required
for promotion. All local officials are obliged to retire 60 years of age. Before they are
appointed to a new position or retire, all officials should have completed at least 3 years
in their present position (Chinese Communist Party, 2002). The combination of these two
rules determines that when local officials are older than 57, they cannot reap the advantages
of a promotion because they are too close to the retirement age. Therefore, their incentive
for performance may decline (Xi, Yao and Zhang, 2018). This paper shows that the po-
litical incentives of local officials can explain their heterogeneous responses to pollution
regulations. When facing the multitask problem of balancing between pollution control
and production, young officials tend to be more responsive to the regulationsand to reduce
output more drastically in regulated firms. At the same time, their incentives encourage
them to reallocate resources to unregulated firms to compensate for the loss of employment
in regulated firms.
This paper aims to make contributions in several areas. First, many researchers have
written about the direct impact of environmental regulations on industries. For example,
©2020 The Department of Economics, University of Oxford and JohnWiley & Sons Ltd
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