Invisible economy, performance assessment of local governments, and environmental regulation in China

Currently, environmental regulation in China is characterized by partial improvement and overall deterioration of the environment. To investigate the impact of China’s environmental regulation on the country’s environment, we consider the invisible economy by constructing a Stackelberg game model between local governments and polluting enterprises based on the Chinese institutional structure. We derive the following findings: (1) Increasing the invisible economic production scale causes the enterprise to reduce the pollution control level, resulting in increasing total pollutant emissions. Increasing the invisible economy production scale increases the enterprise’s profit but undermines the utility of the local government. (2) The higher the proportion of environmental performance in the performance assessment of the local government is, the greater is the incentive for the local government to regulate the environment, which can force the enterprise to improve the pollution control level. However, there is an inefficient range for the proportion of environmental performance. (3) The lenient the pollutant emissions limit is, the weaker is the local government’s environmental regulation intensity and the enterprise’s pollution control level. (4) The higher the unit fine levied on the enterprise for excessive emissions is, the lower is the environmental regulation intensity of the local government, which can bring about improvement in the enterprise’s pollution control level and reduction in total pollutant emissions. The results of the study have positive effects on sustainable environmental regulation in China under the invisible economy.