Impact of fiscal decentralization on firm environmental performance: evidence from a county-level fiscal reform in China
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RESEARCH ARTICLE
Impact of fiscal decentralization on firm environmental performance: evidence from a county-level fiscal reform in China Huwei Wen 1,2 & Chien-Chiang Lee 1,2 Received: 25 April 2020 / Accepted: 8 June 2020 # Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract To promote county economic prosperity and social development, China enacted a fiscal reform known as “province governing county” (PGC) in the early 2000s. Using the difference-in-differences (DID) method and a massive sample of enterprises from 2003 to 2011, this study investigates the effect of PGC reform on firm environmental performance. The results show that enterprises in reformed counties have significantly decreased their pollution intensity since the fiscal reform. Our research reveals that the environmental effects of fiscal decentralization are related to changes in the political assessment metrics of local officials. It also shows that PGC fiscal reform has a significant positive effect on the environmental performance of large, small, and micro enterprises. Furthermore, it suggests that PGC fiscal reform benefits the environmental performance due to the informational advantages of county governments. In terms of environmental governance, although local governments have an information advantage in the allocation of green fiscal funds, well-designed mechanisms are needed to strengthen their motivation. Keywords Fiscal decentralization . Information asymmetry . Environmental governance . Intervention effect . China
Introduction Externality is a dominant characteristic of environmental pollution, and enterprises may have little incentive to invest in environmental protection without clearly defined property rights for environmental resources (Saltari and Travaglini, 2011). It is well known that developing countries, including China, experience severe environmental problems during industrialization. Water and air pollution in China have become severe since the late-1990s. According to a 2006 report by the World Bank, only 28% of the 500 river sections monitored in China are drinkable, and one third of the water has been polluted and cannot be used for agricultural purposes. Nevertheless, although property rights for environmental
Responsible Editor: Nicholas Apergis * Chien-Chiang Lee [email protected] 1
Research Center of the Central China for Economic and Social Development, Nanchang University, Nanchang 330031, China
2
School of Economics and Management, Nanchang University, Nanchang 330031, China
resources are still not clearly defined, enterprises in China have continuously increased their environmental investment since the mid-2000s. The aim of this paper is to provide a novel interpretation of this improvement in firm environmental performance based on the decentralization theory. Decentralization is a mainstream institutional arrangement between different levels of governments and has been the reform orientation of China’s fiscal system in recent decades. China initiated fiscal decentralization in 1980
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