Project No: 16500617

Title: The Economic Impacts of Water Quality Monitoring in China

PI: Prof. He, Guojun    CI: Mr. Wang, Shaoda; Prof. Zhang, Bing


The effect of environmental regulation on economic development has long been controversial in the environmental economics literature, especially for the developing world. This gap in knowledge has become rather disturbing, as many developing countries, such as China and India, start to face stark tradeoffs between sustaining robust economic growth and preserving a better environment.

To address increasingly serious environmental challenges, the Chinese government established a national water quality monitoring system to collect surface water quality information. The water quality readings are then used to assess local governments’ environmental performance, which plays an increasingly important role in the promotion of local officials.

We argue that the establishment of the monitoring system provides a unique empirical context, in which we can exploit a novel spatial-discontinuity design to credibly identify the causal relationship between environmental regulation and economic development. Since rivers have a fixed flow direction, water monitoring stations along a river can only pick up upstream water pollution information, not downstream. As a result, local governments have a strong incentive to enforce tight environmental regulation in the upstream regions, but not in the downstream regions. Upstream regions would therefore face much more stringent environmental scrutiny than downstream regions.

By focusing on a very narrow geographical band that only consists of a few townships upstream and downstream of a monitoring station, we are able to estimate the causal effect of water quality monitoring on economic development using a regression discontinuity design. The choice of monitoring station locations is arguably exogenous because the location is chosen for hydrological reasons. In fact, most water quality monitoring stations are simply extensions of the hydrological stations established in the 1950s and 1960s, and are only used to collect meteorological and hydrological data. That implies that if a monitoring station had not been established, there would not be any discontinuities in economic outcomes between townships upstream and downstream of a monitoring station.

There are roughly 300 national water quality monitoring stations along the major rivers for which we can explicitly identify upstream and downstream townships. Essentially, we will compare economic outcomes for more than 300 separate upstream-downstream pairs. This not only strengthens the credibility of the research design, but also enables us to explore the heterogeneous effects of environmental monitoring with high degrees of flexibility.

In addition to its academic value, given that the Chinese government has set environmental protection as one of its top priorities for the next two decades, this study can also help policy makers design better policy instruments in the future by deepening our understanding of the consequences of environmental regulation in China.