Horizontal ecological compensation policy and water pollution governance: Evidence from cross-border cooperation in China

Cross-border cooperation can overcome the administrative boundaries of water pollution governance, and the two-way ecological compensation model emerges as a solution to transforming government-financed payments into locally-driven development initiatives. This study presents a tripartite evolutionary game model for two-way ecological compensation, incorporating city-level data, and employs time-varying difference-in-differences to estimate the incentive impact of China's cross-border horizontal ecological compensation policy on water pollution governance during 2006-2018. Furthermore, this study aligns state-controlled monitoring stations with their respective administrative districts and enhances water pollution indicators obtained from these stations for a more comprehensive policy assessment. The results show that horizontal ecological compensation effectively reduces the prevalence of industrial wastewater discharges and associated water pollution; this effect is more pronounced upstream (20.94%) compared to downstream (16.01%). However, it does not significantly impact urban sewage treatment, agricultural non-point source pollution, or lake water quality and eutropHication. In addition to promoting horizontal coordination between upstream and downstream regions, vertical central governmental inspections are crucial for effectively stimulating and guaranteeing horizontal collaborative governance between upstream and downstream local governments. These results provide strong empirical evidence in favor of expanding horizontal ecological compensation initiatives throughout the entire river basins, as well as in other countries or regions.