The effect of government-firm relationship on pollution reduction: The role of official performance appraisal

This paper investigates the unexpected positive effect of the government-firm relationship on environmental governance in the context of the reform of official performance appraisal (OPA) in China. In 2013, the central government launched an OPA reform that aimed to reduce the dependence on GDP growth and increase the focus on environmental protection in the appraisal process. According to the empirical results, in cities with mayors who have promotion incentives, firms that received favor from local governments can significantly reduce air pollutant emissions after the OPA reform. These findings remain robust even after conducting various tests, such as parallel trend test, omitted variables, and alternative explanations. This paper demonstrates that a reciprocal relationship between governments and firms can benefit society with the appropriate incentives. In China, the central government determines the statutory nominal tax rate for enterprises and determines the performance evaluation and promotion standards for local government officials. Local governments determine the actual tax rate of enterprises, and often provide more tax incentives to these closely related enterprises. Enterprises must repay government support. When the central government places more emphasis on environmental protection in performance evaluation, local government officials must attach importance to environmental protection in order to achieve promotion. At this time, these enterprises with closer relationships with the government must also respond to local government requirements, thereby reducing pollutant emissions. This indicates that if there are reasonable incentive policies, a close relationship between government and enterprises is beneficial for reducing environmental pollution. [Display omitted] •Treat the reform of the performance appraisal system for Chinese officials as a quasi-natural experiment of the changes in environmental protection incentives for local government officials.•A close relationship between government and enterprises can help reduce corporate pollution when government officials receive appropriate incentives.•The close relationship between government and enterprises mainly achieves emission reduction by promoting the development of green production technology, purchasing environmental protection equipment, and reducing pollution emissions per unit output.