Incentives and Outcomes: China's Environmental Policy

Abstract

China’s record-breaking economic growth is evoking increasing concern about unaddressed environmental problems. We show that, while city government spending on environmental infrastructure has a demonstrably positive environmental impact, city spending is nonetheless strongly tilted towards transportation infrastructure. City governments’ investment in transportation infrastructure is strongly positively correlated with real GDP growth, a measure of tangible economic growth that is found to raise city-level cadres’ odds of being promoted, and with land prices, which elevate city governments’ revenues from land lease sales and thus augment city-level cadres’ budgets. In contrast, city governments’ spending on environmental improvements is at best uncorrelated with cadres’ promotion odds, and is also uncorrelated with local GDP growth and land prices. These findings suggest that, were environmental quality explicitly linked to cadres’ chances of promotion, or were environmental quality to affect land prices substantially, city-level public investment in environmental improvement would rise.

Keywords: Urban Infrastructure, Environmental Protection, Local Government, China

JEL Classification: H54, P26, Q58, R11