Incentives, penalties, and rural air pollution: Evidence from satellite data

I test the role of economic incentives and command and control in reducing agricultural fires, a major source of air pollution in most rural regions across the world caused by burning crop residues after harvest. To tackle data shortage, I use high-resolution satellite data to construct a fine measure of agricultural fires as well as other geographic characteristics at 1 km x 1 km resolution for China. Using the staggered arrival of biomass power plants, which purchase crop residues as production inputs from nearby areas, as a shock to economic incentives, I find a more than 30% drop in agricultural fires in the vicinity of a plant after its opening relative to areas farther away. Such drop cannot be explained by structural transformation, migration, or enhanced regulation near the plant, and is consistent with an incentive-based explanation. I then examine the effectiveness of a command and control policy that bans agricultural fires within 15 km of airports. Using a spatial regression discontinuity design, I find no evidence that such policy works.