WIP8.
The Institutional Design of Environmental Control
Governments routinely regulate activities that generate cross-jurisdictional spillovers, none more consequential than pollution. Regulating pollution requires balancing two competing design principles: coordination across jurisdictions to internalize spillovers, and local capacity to control environmental damage. We develop a simple model that formalizes this tradeoff and test its implications using large-scale government fragmentation episodes in India and Pakistan. Empirically, we show that emissions from crop-burning, a large air pollution problem in the region, rise substantially after district splits, in line with environmental theories emphasizing incentives to shift pollution across newly created borders. At the same time, we show that gains in administrative capacity produced by the split partially offset these coordination losses. On net, fragmentation increases emissions, suggesting that planners underaccount for environmental spillovers when designing jurisdictions. These findings highlight that, unlike government functions with limited externalities, policies characterized by cross-jurisdictional spillovers amplify the tradeoffs of institutional reform, making coordination failures especially costly.