Does Government Decentralization Shape Firms’ Pollution Emissions? Evidence from a Natural Experiment in China

Abstract

ABSTRACT This study investigates whether and how government decentralization affects firms’ pollution emissions. To identify causality, we introduce a triple-difference strategy based on a natural experiment launched by the central government of China, i.e., the “Province-Managing-County” fiscal reform, which aims to eliminate the prefecture government as the intermediate layer between province and county. We show that the PMC fiscal reform increases firms’ pollution emissions. Our findings are particularly pronounced for firms located in Eastern China and in provinces with high-level marketization. Welfare analysis exhibits that decentralization-induced pollution on PM2.5 leads to around 449–663 increase in death every year at the county-level.