Strategic Interaction in Environmental Protection Efforts among Chinese Provincial Governments

Abstract

In the study of this chapter, we investigate the issue of strategic interaction in environmental protection efforts among the Chinese provincial governments. Based on theoretical models of strategic interaction, which lead to the theoretical reaction function, we specify our empirical model and estimate the reaction slope of the empirical reaction function. We opt for a lagged panel data approach in order to circumvent the endogeneity problem and to mitigate spatial error dependence in estimating the reaction slope. Our regression results from various estimation techniques, of which our preferred method is the fixed effects method, show that the Chinese provincial governments engage in strategic interaction in deciding on the levels of their efforts in environmental protection. The significantly positive estimates of the reaction slope suggest that the environmental protection efforts of the provincial governments, as reflected by their levels of the per-unit-of-GDP environmental protection expenditure, are “strategic complements”. Our empirical results also suggest that direct inter-provincial strategic interaction in environmental protection efforts may occur only among contiguous provinces in China.