Friday, November 08, 2013

Free Riding and River Water Pollution in China

In September 2013, I visited the National University of Singapore and had the opportunity to work with two economists at their Institute of Real Estate Studies.  Pei Li, Daxuan Zhao and I have just released this new NBER Working Paper.  

Pollution Control Effort at China's River Borders: When Does Free Riding Cease?

Matthew E. KahnPei LiDaxuan Zhao

NBER Working Paper No. 19620
Issued in November 2013
NBER Program(s):   EEE   PE   POL 

At political boundaries, local leaders often have weak incentives to reduce polluting activity because the social costs are borne by downstream neighbors. This paper exploits a natural experiment set in China in which the central government changed the local political promotion criteria and hence incentivized local officials to reduce border pollution along specific criteria. Using a difference in difference approach, we document evidence of pollution progress with respect to targeted criteria at river boundaries. Other indicators of water quality, not targeted by the central government, do not improve after the regime shift. Using data on the economic geography of key industrial water polluters, we explore possible mechanisms.

So, our study builds on Hilary Sigman's classic AER paper where we demonstrate the role of leaders and their power in China to change the status quo.  As usual, the key issue focuses on incentives. What incentives does the leader face to address the issue? Are there unintended consequences of the new policy choices that are made?