Reciprocity and state capacity: Evidence from a national pollution control reform in China

We propose a new approach to pollution control from the social contract perspective, which highlights the reciprocal obligations between firms and the government, in contrast to the conventional regulatory view. Combining granular data on Chinese industrial firms with a 2007 reform that sharply increased the government’s incentives for pollution control, we show, in a difference-in-differences framework, that firms with prior government support achieved greater emission reductions than those without following the reform, primarily through costly clean technology adoption and output cuts. These effects are consistent across various strategies that account for the potential endogeneity of government support and appear to be driven by reciprocity between firms and the government, as (a) the effects are more pronounced in regions with stronger norms of reciprocity, and (b) the government, in turn, responded with continued support. Alternative explanations—including government leverage, financial constraints, regulatory enforcement, and political connections—cannot explain our findings. We further examine the aggregate implications of firm-government reciprocity at the city level, exploiting quasi-random variation in city-level support induced by plausibly exogenous mayoral rotation and across-mayor variation in support preferences in an instrumental variable design. We find that such reciprocity translated into significant declines in regional pollution concentrations, thereby enhancing the government’s capacity for pollution control.