Exploration of the long-term performance-oriented incentive mechanism for balancing environmental and economic policies

Abstract

In the implementation process of economic and environmental policy, a key concerned problem is the inability of some local officials to faithfully implement environmental policies made by the central government in China, as well as many other developing countries. In this paper, a multitask principal-agent model is established to make a comprehensive comparison on the role that the current incentive mechanism (CIM) and the long-term performance-oriented incentive mechanism (LTPOIM) play in policy implementation. In addition, both the incentive effect and the choice of incentive intensity in the LTPOIM are investigated. The results provide the insight that local officials may trade off the efforts of environment protection for economic growth in the CIM. However, local officials are incentivized to allocate higher efforts toward the implementation of environmental policies (IENP) to strengthen environment protection, or invest higher efforts toward IENP and the implementation of economic policies (IECP) to pursue the win-win situation for economy and environment in the LTPOIM. Besides, the chance of distributing higher efforts toward IENP and IECP in the case of complement tasks is higher than that in the case of substitute tasks. The optimal incentive intensities of long-term performance in the case of complement tasks are higher than those in the case of substitute tasks.