Credible signaling to promote local compliance: Evidence from China's multiwave inspection of environmental protection

Different from common knowledge on central–local information asymmetry, this study focuses on reverse information asymmetry, in which local governments may lack information on the intentions and resolve of the central government. Such information asymmetry can lead to a loss–loss scenario, wherein central‐government‐designed policies are eroded and local governments are punished. Arguably, with a multiwave inspection scheme, the central government can credibly signal its emphasis on certain policies and intentions to punish noncompliance, deterring yet‐to‐be‐inspected local governments. This argument is examined with China's Central Environmental Protection Inspection (CEPI) policy. Empirically, the CEPI policy can reduce pollution in the long run. Moreover, the credible signals generated by the previously completed inspection waves, which encourage local governments to rectify environmental regulations proactively, are essential. Furthermore, the strength of local compliance with central signaling largely depends on the hierarchical and geographical distances from the signaling source to the receiver.