Role of income and policy in reducing water pollution: Evidence from the Mississippi River Basin Healthy Watersheds Initiative

We study the effectiveness of the Mississippi River Basin Healthy Watersheds Initiative (MRBI) in reducing nitrogen pollution in surface water bodies. We use a Kitagawa-Oaxaca-Blinder (KOB) counterfactual decomposition method to quantify the role of income and policy in reducing nitrogen pollution in waterbodies. Our results show that the MRBI policy for the 2012 cohort of implemented watersheds across five states (Arkansas, Indiana, Iowa, Kentucky, and Tennessee) experienced a 43% reduction in nitrogen concentrations when comparing the 2009–2011 pre-treatment period to the 2012–2018 post-treatment period. Decomposition results show that 79% of the improvement in water quality from policy treatment is derived from an endowment effect, driven mainly by location-fixed effects that include cross-sectional mean differences in income, among other characteristics. Results also show that 21% of differences are derived from the coefficient effect or differences in the response of policy-treated watersheds compared to a set of control watersheds.