UGOD Thrust Seminar | Transboundary Water Quality Regulations: Multitasking, Misaligned Incentive, and Pollution Redistribution

To monitor and control transboundary water pollution, the central government of China installed water quality monitoring stations at the provincial boundaries. This paper investigates how local governments strategically respond to this transboundary pollution monitoring. Using a spatial regression discontinuity design, we show that: (1) if there is transboundary pollution monitoring, counties in upstream provinces significantly reduce their emissions; (2) if there is no monitoring, counties in upstream provinces significantly increase their emissions; (3) as environmental policies became more stringent over time, both types of discontinuities enlarged, suggesting polluting activities were relocated from the monitored regions to non-monitored regions. These findings are consistent with a multi-task model in which the central government cares about both GDP and the environment, but environmental quality can only be partially measured. Further, using the data on land supply and the establishment of Economic Development Zones, we provide evidence that local governments proactively attract polluting firms in the non-monitored regions.