The impacts of political hierarchy on corporate pollution emissions: Evidence from a spatial discontinuity in China

Abstract

Exploiting Chongqing's promotion to a province-level municipality, this paper investigates the causal effect of political hierarchy on corporate SO2 emissions using a spatial regression discontinuity (RD) design. In 1997, the prefecture-level Chongqing was promoted to a province-level municipality, obtaining a substantial increase in decision-making power over fiscal, personnel and administrative affairs. Given the fact that the areas around the Chongqing-Sichuan border shared the same social, economic, and geographical conditions prior to the treatment, the novel findings show that political hierarchy negatively affects corporate SO2 emissions and Chongqing's enterprises adjacent to the border have a 26% (1-e−0.301) reduction of SO2 emissions comparatively. The effects are robust enough using alternative model specifications and bandwidths. Besides, this paper provides empirical evidence that enterprises of Chongqing have resource-receiving and external-financing advantages owing to its higher political status. These interwoven advantages help enterprises in Chongqing exhibit better financial performance and enable them to conduct energy substitution, improve energy efficiency and adopt more end-of-pipe treatment, thereby mitigating SO2 emissions. Based on these findings, this study provides policy implications by shedding light on the effects of political hierarchy on corporate pollution emissions.