Governance on water pollution: Evidence from a new river regulatory system of China

Abstract

This paper investigates the impact of an innovative river regulatory system in China, the River Chief System, on industrial firms' polluting activities. Several unique features of this system make it quite different from traditional environmental regulations and thus draw our attention to its effect in combating water pollution. Using a generalized difference-in-differences strategy based on a rich firm-level data set, we find that this policy reduces firms' water pollution by 20%. The reduction can be explained by firms' increase in adopting abatement technologies, improvement in water-related usage efficiency, and changes along both the intensive and extensive margins. The tightened regulation reduces firms’ output while induces polluting firms to exit or impede their entry to regulated markets. In addition, heterogeneity analyses indicate that the River Chief System has a stronger effect on polluting industries, state-owned enterprises, large-scale firms, and firms located in areas governed by government officials with higher political incentives.