Centralization and firm pollution emissions: Evidence from City–county Merger in China

Abstract

This study examines the effect of centralization on firm pollution emissions. Using the datasets of firm-level emission and exploring the city–county merger policy (CCM) in China, we find that as CCM transfers much power from county to city, the pollution emissions of firms located in counties have reduced by 48%. This conclusion is still valid under multiple identification and robustness tests. Further analysis suggests that the vertical reform of the environmental protection agency (direct effect) and the change in county government's targets (indirect effect) are two important mechanisms. Additionally, firm pollution emissions will reduce more in counties that easily implement this policy. Our findings have important policy suggestions. First, to effectively solve the negative externalities of environmental pollution, government should reform the EPA. Power centralization of environmental regulation promotes environmental protection. Second, the central government should add more environmental protection factors in local officials' promotion evaluation system. Thus, the local officials will be aware that they should focus more on protecting the ecological environment while developing the economy.