Administrative decentralization, government-firm interaction and firm pollution emissions

Abstract

The “counties power expansion” (CPE) reform expanded the powers of county governments and caused closer interactions between county governments and firms within their jurisdictions. Taking the CPE reform as a quasi-experiment, this paper uses data from Chinese industrial firms and pollution emissions from 1998 to 2014 to examine the impact of administrative decentralization on firm pollution emissions. We investigate the underlying mechanisms within the framework of government-firm interactions. The results show that administrative decentralization has increased the absolute SO₂ emissions and the intensity of SO₂ emissions per unit of output, while reducing the effectiveness of end-of-pipe treatment for waste gas. As a result, the air quality in the counties has deteriorated, and the intensity of carbon dioxide emissions has increased. Mechanism analysis revealed that county governments stimulated firm investment through government subsidies and tax incentives, which boosted outputs and revenues of firms. Additionally, the effects of administrative decentralization were particularly evident in non-state-owned firms, high-polluting firms, large firms, and firms in eastern regions. Therefore, it is essential to clearly define the responsibilities and financial powers of county governments, formulate comprehensive environmental regulations, implement differentiated tax policies, strengthen supervision, and enhance information transparency to better coordinate economic development and environmental protection.