Managerial incentives for environmental degradation in Chinese-style federalism

Abstract

China’s economic growth has come at the expense of environmental quality and the degradation of natural resources. In this paper, we identify two sources of environmental degradation: career concerns by managers of state-owned forest enterprises (SFEs) that manage natural resources, and asymmetric information between managers and their superiors regarding the SFEs’ environmental performance. A manager of such an SFE is the agent with two principals: national and sub-national governments. As well as needing to meet ecological targets imposed by the national government, a manager wants profits and promotion into the ranks of sub-national government. We develop hypotheses based on a theoretical model and test them on China’s northeastern SFEs by combining satellite imagery on deforestation with economic survey data. We find that deforestation is more likely for managers of SFEs that have a larger area and are thus more difficult to monitor with respect to ecological targets. Furthermore, we find that sharing a larger proportion of profits with the sub-national government increases the likelihood of getting promoted.