Effect of fiscal decentralization on pollution reduction: Firm-level evidence from China

This study aims to investigate whether fiscal decentralization can reduce the pollution emissions intensity of firms. Little is known about how fiscal decentralization affects firm emissions. Based on a quasi-natural experiment of fiscal decentralization in China, that is, the province-managing-county reform, we use firm-level data from 1998 to 2016, and find that the reform can reduce pollution emissions intensity of firms by alleviating the fiscal stress experienced by county governments and intensifying competition between local governments. However, the mechanism is affected by the county-level economic development and migration barriers. The emissions reduction effect of reform is more pronounced in developed counties, and reducing migration barriers can amplify the effect of reform. In addition, we also reveal that the incumbent firms in reformed counties increase their efforts to reduce pollution, whereas the new entrants improve their clean production. •Province managing county (PMC) reform reduces firms' pollution emissions intensity.•Fiscal stress on counties is the important reason for the effect of the PMC reform.•The effect of the PMC reform is affected by county economy and migration barriers.•Incumbent firms increase the effort in pollution removal after PMC reform.•New entrants improve their clean production after PMC reform.