Peer effects in local government decision-making: Evidence from urban environmental regulation

Abstract

• There are significant peer effects in urban environmental regulation (UER) in China. • Cities with higher intensity of environmental regulation have larger peer effects. • The internal learning effect of cities weakens the peer effects of UER. • The external learning effect and competition mechanism strengthen the peer effects of UER. • Exogenous shocks have significant impact on the peer effect of UER. This paper is the first to introduce the theory of peer effects to explain the interactive behavior of urban environmental regulation (UER). We construct a spatial autoregressive (SAR) model including lagged terms of the dependent variable using panel data of 284 cities in China from 2003 to 2019. The results show that: (1) there are significant peer effects of UER among geographically, economically, and administratively related cities, and the highest peer effects is found among geographically adjacent cities. (2) Cities with higher intensity of environmental regulation have larger peer effects and are more likely to be imitated. (3) The internal learning effect of cities weakens the peer effects of UER, while the external learning effect and competition mechanism strengthen it. Exogenous shocks such as the new environmental regulation standard policy, innovation-oriented city pilot work, and the opening of high-speed rail all have a significant impact on the peer effects of UER. The study suggests the central government guides the positive interaction of local governments’ environmental regulations to promote regional pollution control.