How does environmental relative performance evaluation work? The case of China’s urban air quality ranking

Abstract

Adapting to the situation of one principal versus several agents, the Relative Performance Evaluation (RPE) is an effective incentive tool to motivate subordinates. The Chinese central government has adopted RPE to combat intractable air pollution, which is the Urban Air Quality Ranking (UAQR) system. This study uses a series of econometric methods including regression discontinuity design to examine its effectiveness in environmental governance. The results show that (1) since the implementation of UAQR, the overall air quality of cities has improved; (2) air quality of the bottom 3 cities in the ranking will improve in the coming month compared with their counterparts; (3) while top 3 cities in the ranking do not experience such change in air quality. Therefore, this paper argues that the activating based RPE does not stimulate effective competition, whereas competency based RPE does. UAQR with credible incentive commitment can be a useful measure to motivate local authorities to strengthen air pollution reduction. In this study, the results of the empirical analysis enrich the theoretical framework of RPE, and an innovative theoretical framework is adopted to explain the UAQR system. However, as a top-down environmental monitoring system, such ranking institution could mainly eliminate centralized discharged pollutants. A sound judicial system is the fundamental guarantee for sustainable development.