Working Paper: NBER ID: w30233
Authors: Shiyi Chen; Joshua S. Graff Zivin; Huanhuan Wang; Jiaxin Xiong
Abstract: This paper investigates the impact of a pioneering pollution reduction program, the Ecological Compensation Initiative (ECI) in China, which establishes side payments between upstream and downstream provinces along the same river. The program includes both Coasian and pay-for-performance elements. Instructed by a theoretical model, we employ a difference-in-differences empirical design and find strong evidence that the ECI mitigates the spillover effect of water pollution at the province boundary and brings about sharp reductions in water pollutant emissions from upstream firms, especially those in heavily polluting industries. This initiative also reduces upstream firms’ output and pollution intensity relative to downstream firms. The impact is stronger for upstream firms closer to the river and the point at which it enters the downstream province. Further evidence shows a significant increase in the rate of firms’ entry into neighboring prefectures, but no impact on firms’ exit from that region due to the initiative. Evidence from similar programs, later established in other river systems, suggests that cross-jurisdictional negotiations can effectively mitigate cross-border pollution externalities.
Keywords: No keywords provided
JEL Codes: D22; H7; K32; Q53; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| ecological compensation initiative (ECI) (Q57) | reduction in water pollution (Q53) |
| ecological compensation initiative (ECI) (Q57) | reduction in pollution intensity and output from upstream firms (Q52) |
| ecological compensation initiative (ECI) (Q57) | increase in probability of upstream firms reducing water pollution after 2011 (Q52) |
| ecological compensation initiative (ECI) (Q57) | shift in firm behavior (D21) |
| ecological compensation initiative (ECI) (Q57) | no significant impact on exit rates (I21) |
| ecological compensation initiative (ECI) (Q57) | sharper reductions in pollution for firms with less reliance on industrial production (Q52) |