Principal-Agent Model of Local Government Environmental Regulation Implementation under Chinese Style Decentralization

There is the principal-agent relationship between local government and central government in environmental regulation implementation. The optimal incentive contract and its influencing factors are given through establishing multi-task principal-agent model of local government and central government in China. The impact on optimal incentive contract from related factors of local government environmental regulation is analyzed based on the multi-task principal-agent model. The results show that the optimal incentive contract is affected by the degree of central government's attention on economic growth and environmental quality, the economic development ability of local government, the variance of pollution reductions, the risk preference of local government, the implementing cost of environmental regulation and the economic cost of environmental regulation. The central government should establish and adjust optimal incentive contract based on the degree 'of central government's attention on different task and the attribute of local government.