Stringency of environmental policy in China: When pollution drives bribery

Abstract

This study provides a political economy explanation for the recently increased stringency of China's environmental policy. Specifically, we argue that prior to 2009, bribery from polluting firms was relatively successful in persuading local regulators to implement weak environmental policies. Since that time, pollution has reached a threshold that significantly changed regulators' objectives, leading them to refuse bribes, hence strengthening environmental policy. Thus, we built a theoretical general equilibrium model (with uncertainty about a pollution-induced catastrophe) in order to investigate the decision-making of local regulators. Using pollution and bribery data from China, we empirically confirmed the existence of a threshold for PM2.5 and calibrated our theoretical model. We showed that the current pollution level is higher than the optimal level of 9 μg/m 3 that a forward-looking regulator would target (with a 1.5% risk of facing a pollution catastrophe). This suggests that the current pro-environmental activities of Chinese firms have been triggered by the changing behaviors of local regulators. • The current more stringent environmental policy in China is attributed to less bribery. • The reduction in bribery in China is due to a stochastic pollution threshold. • The stochastic pollution threshold was reached in China between 2009 and 2016. • Forward-looking local regulators should choose a steady-state with low pollution. • China's severe pollution in the past is attributed to myopic local regulators.