Financial Decentralization and Environmental Pollution Research—An Empirical Test Based on Data from 279 Cities in China

Abstract

By establishing a principal–agent model, this study introduced the local government’s behavior and deduced the local government in the face of incentive policies, which means that it has more power to develop the economy at the cost of environmental pollution. Furthermore, from the perspective of fiscal expenditure structure and local government competition, the influence path of fiscal decentralization on environmental pollution is examined. Thus, this methodology unifies three seemingly different but strongly interrelated hypotheses into one single composite model. Firstly, the bidirectional fixed effect model tests the relationship between fiscal decentralization and environmental pollution empirically and shows that the improvement of fiscal decentralization will aggravate environmental pollution. Additionally, combined with the inverted U-shaped relationship between economic development and environmental pollution, this paper argues that fiscal decentralization has different impacts on environmental pollution at different levels of economic development. Secondly, the results of the mechanism test prove that fiscal decentralization will increase regional competition, increase the scale of foreign capital utilization, and reduce the proportion of local government expenditure for public welfare, thus increasing environmental pollution. Thirdly, heterogeneous regression results demonstrate that fiscal decentralization will increase the environmental pollution of high pollution areas and non-provincial capital cities but has no significant impact on low pollution areas and provincial capital cities. Based on the above conclusions, this paper develops countermeasures to control environmental pollution from optimizing fiscal decentralization structure.