Abstract:-

With rapidly depleting natural resources, governments across the world face the task of balancing economic development with conservation efforts. We study how the governance structure surrounding environmental policy-making, specifically decentralization of natural resource management shapes this trade-off by examining the economic projects in India that required diversion of forest land and were submitted to the Indian government for approval. We compile the universe of proposal submissions and their application outcomes and exploit a policy reform that decentralized the approval authority for a certain size of projects from the Central to State governments. We find that decentralization significantly increased the number of applications, but reduced the probability of approval. Estimates from a structural model with endogenous applications and approvals indicate that while State governments (as compared to the Center) put a 6% lower weight on economic development (vis-a-vis conservation), they also have 11% lower application cost. This results in a lower quality and higher volume of projects being proposed and approved, resulting in more deforestation without much economic development. From the lens of a dynamic model, we show that while State governments fundamentally value economic development more, they optimally choose to be more stringent in approvals, in response to lower costs and more applications received by them.