China’s extremely high levels of urban air, water and greenhouse gas emissions levels pose local and global environmental challenges. China’s urban leaders have substantial influence and discretion over the evolution of economic activity that generates such externalities. This paper examines the political economy of urban leaders’ incentives to tackle pollution issues. Based on a principal-agent framework, we present evidence consistent with the hypothesis that both the central government and the public are placing pressure on China’s urban leaders to mitigate externalities. Such “pro-green” incentives suggest that many of China’s cities could enjoy significant environmental progress in the near future.
Since I know that the readers of this blog prefer pictures to words, permit me to show you a single slide that tells the whole story. For those who want more Laffont and Tirole in their lives, there is a double principal-agent issue here. China's urban mayors are the agents who have private information about their pollution mitigation efforts. The two principals are the central government in Beijing and the urban public. Our paper makes progress on investigating how reductions in information costs and the role of civil society play in mitigating this classic problem.