Decentralization and Water Pollution Spillovers: Evidence from the Redrawing of County Boundaries in Brazil

We examine the effect of political decentralization on pollution spillovers across jurisdictional boundaries. Upstream water use has spillover effects on downstream jurisdictions, and greater decentralization (i.e. a larger number of political jurisdictions managing the same river) may exacerbate these spillovers, as upstream communities have fewer incentives to restrain their members from polluting the river at the border. We use GIS to combine a panel dataset of 9,000 water quality measures collected at 321 monitoring stations across Brazil with maps of the evolving boundaries of the 5500 Brazilian counties to study (a) whether water quality degrades across jurisdictional boundaries due to increases in pollution close a river’s exit point out of a jurisdiction, and (b) what the net effect of a decentralization initiative on water quality is, once the opposing impacts of inter-jurisdictional pollution spillovers and increased local government budgets for cleaning up the water are taken into account. We take advantage of the fact that Brazil changes county boundaries at every election cycle, so that the same river segment may cross different numbers of counties in different years. We find evidence of strategic enforcement of water pollution regulations; there is a significant increase in pollution close to the river’s exit point from the upstream county, and conversely a significant decrease in pollution when the measure is taken farther downstream from the point of entrance. Pollution increases by 2.3% for every kilometer closer a river gets to the exiting border, but in the stretch within 5 kilometers of the border this increase jumps to 18.6% per kilometer. Thus the greatest polluting activity appears to be very close to the exiting border. Our theoretical model coupled with the empirical results are strongly suggestive that these results are evidence of strategic spillovers rather than spurious correlation between county splits and pollution stemming from changing population density. Even in the presence of such negative externalities, the net effect of decentralization on water quality is essentially zero, since some other beneficial by-products of decentralization (in particular, increased local government budgets) offsets the negative pollution spillover effects. We thank Marianne Bertrand, Erin Mansur, Bernardo Mueller, numerous water management practitioners at the federal and various state water agencies in Brazil, and seminar participants at the University of Colorado at Boulder, Yale University, University of Michigan, Harvard University, Wesleyan University, the 2007 NBER Summer Institute in Environmental Economics, 2007 BREAD conference and the 2006 ISNIE conference for helpful discussions and comments. All errors are our own.