Can Technology Solve the Principal-Agent Problem? Evidence from China’s War on Air Pollution

Michael Greenstone, Guojun He, Ruixue Jia, Tong Liu

Key Takeaways:

• The central government of China awards local officials who are able to achieve economic and social targets with incentives such as promotions. Such an incentive system can be effective in achieving targets, but also creates opportunities to underreport data that could stand in the way of achieving incentives—pollution data being one example.
• In an effort to increase transparency and improve data quality, the central government installed an automatic pollution monitoring system that publishes air pollution information in real time to the public.
• Comparing pollution data from before and after the installation of the technology, the researchers find that air pollution concentrations were significantly underreported by the local governments prior to the automation—reported pollution concentrations increased 35 percent immediately after automation. Importantly, satellite measurements indicate no change in true air quality before and after the installation.
• Those cities with higher GDPs were less likely to underreport the data, while cities with high pollution levels were more likely to underreport the data.
• With improved air pollution data indicating higher levels of pollution, individuals appeared to respond by taking greater measures to protect themselves from air pollution. Specifically, online searches—a high correlator for purchasing behaviors—tripled for “face masks” and increased by 20 percent for “air filters.” The implication is that the manipulated data led people to have a false sense of security and insufficiently protect themselves from air pollution’s dangers.
• Improved data thanks to the automatic monitoring contributed to the Chinese government’s successful “war on pollution,” as well as individual efforts to protect against harmful pollution.