From Tournament to Compliance: How Performance Evaluation Design Shapes Interlocal Collaboration Governance

• In Event: Collaborative Governance and Institutional Design

Abstract

In principal-agent relationships, performance evaluation is a core mechanism for inducing agents’ effort on assigned tasks, both in multi-level government systems and in electoral politics. When multiple agents face the same principal, they are typically evaluated under a common system, which determines the allocation of scarce resources or promotion opportunities. In such settings, agents often lack incentives to engage in actions that improve their own performance while also benefiting others, because such actions do not improve relative competitive advantage. In practice, cross-jurisdictional cooperation is a typical example: in multi-level government systems, self-initiated cooperation rarely emerges without higher-level authority, even if it benefits both parties.

This paper develops a theoretical framework to analyze how performance evaluation affects cooperative behavior. In the framework, agents can improve performance through cooperation, generating positive externalities. The principal can conduct performance evaluation through either rank-based or compliance-based evaluation. We show that under rank-based tournament, cooperation generates shared improvements that do not affect relative standings, while exposing agents to opportunistic behavior by competitors, thereby undermines incentives for cooperation. In contrast, compliance-based evaluation changes this situation through two channels. First, an incentive channel: by substituting compliance for relative competition, it helps avoid race-to-the-bottom dynamics. Second, a trust channel: by setting severe penalties for non-compliance, the motivation for strategic defection is greatly reduced, thereby providing a basis of trust for cooperation.

This paper empirically tests these hypotheses in the context of China’s Joint Atmospheric Pollution Control and Prevention program. We collect micro-level records of environmental cooperation from 2012 to 2020 across six major joint control regions in China, along with biographical information on city secretaries. We construct an official similarity measure capturing the potential competitive relationship between two officials, based on evidence from the Chinese political promotion literature. Exploiting quasi-random variation in official rotation, we find that a one-standard-deviation increase in official competition reduces the likelihood of cooperation by 13% and the number of cooperative events by 17%. Using shocks from central environmental inspections, we find that under compliance-based evaluation, the inhibitory effect of bureaucratic competition is weakened and even reversed. These effects are stronger among city pairs within the same province with higher competition and stronger atmospheric transport linkages.

We provide additional evidence on mechanisms. First, on incentives, the inhibitory effect is stronger when officials are under 57 or in early tenure, suggesting promotion incentives matter for cooperation. We also find that when city pairs fail to meet PM2.5 compliance thresholds, cooperation increases more strongly after inspection. Second, on trust-building, the cooperative effect of inspections mainly exists among low-trust city pairs without hometown or career ties, indicating that compliance-based inspection substitutes for missing relational trust.

Our study contributes to three strands of literature. First, it contributes to principal–agent literatures and incentive contract design by extending analysis from single-agent effort to inter-agent cooperation. Second, it contributes to interlocal cooperation literatures such as institutional collective action by endogenizing performance evaluation design. Third, it contributes to top-down intervention literature by showing how inspection reshapes incentive and trust among local officials.

Authors

• Hengrui Yang, Tsinghua University
  Presenting Author

• Junming Zhu, Tsinghua University
  Non-Presenting Co-Author