Turning a blind eye: How local government fiscal distress affects the entry of energy-intensive enterprises

Abstract

This study explores the impact of local fiscal distress on energy-intensive entrepreneurial ventures. We theoretically establish a conceptual framework between government fiscal distress and energy-intensive entrepreneurial activity through the lens of environmental regulation. Using the newly available firm registration data, we employ the Poisson regression model and find that the falling fiscal condition of county governments triggered by an exogenous tax reform significantly leads to more entry of energy-intensive enterprises. We uncover that the increased entry of energy-intensive enterprises is primarily driven by relaxing environmental regulation rather than other policy changes. Delving into firm nature, we find that these energy-intensive entrants are usually large firms and privately owned firms. Further evidence suggests that industrial agglomeration, regional marketization levels, and legal environments negatively moderate the impact of fiscal distress on the entry of energy-intensive enterprises. This paper sheds light on the potential environmental consequences of governments' fiscal distress.