Does strict environmental regulation lead to incentive contradiction? - Evidence from China.

China has witnessed a drop in the speed of its economic development from 14% to 6% since 2007. The literature has attributed "the miracle of China's economic growth" over the past four decades to the compatibility of political incentives and fiscal incentives. However, as the central government shifts its priorities from "development is the last word" to "lucid waters and lush mountains are invaluable assets", can local officials' political and financial incentives still achieve incentive compatibility? Theoretically and empirically, this paper examines the impact of the compatibility of political and financial incentives on local governments' environmental governance in different stages. We find that environmental performance has consistently been an important political promotion incentive for officials, especially after 2007. We also find that officials in cities with incentive compatibility have no promotion advantages over their opponents because incentive compatibility restrained the development of the manufacturing industry, leading to a suppression of the economic growth rate. Local governments sacrifice a certain economic growth rate - in other words, local fiscal revenue - in exchange for environmental quality improvements and adopt strategic actions to cater to the central government's new performance evaluation system, which focuses mainly on environmental protection assessment through strategic behavior.