Impact of fiscal decentralization on firm environmental performance: evidence from a county-level fiscal reform in China

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.