Fiscal decentralization, local government behavior and environmental pollution: Evidence from "Province-Managing-County" reform in China.

The impact of fiscal decentralization on environmental pollution is a widely debated topic that remains inconclusive. Central to this discussion is whether local governments pursue a "race to the top" or "race to the bottom" competitive strategy. The environmental federalism theory provides insight into this dynamic within federal system but falls short in explaining similar phenomenon in non-federal systems. This study utilized a quasi-experiment originated from the "Province-Managing-County" reform in China spanning from 1997 to 2017 to explore the impact of fiscal decentralization on environmental pollution. The findings reveal that the "Province-Managing-County" reform resulted in a general exacerbation of environmental pollution, the PM concentration in pilot areas increased by 2.894 μg/m3, but the effect exhibits heterogeneity in terms of different time and space. Subsequent analysis uncovered that the institutional environment and competitive endowments significantly influenced the enviromental governance of local governments, while the promotion motivation of main officials does not exhibit significant effect. This study offers a precise assessment of the impact of fiscal decentralization on regional environmental governance and sheds light on the diverse outcomes reported in prior studies. Furthermore, this study provides useful policy recommendations such as strengthening "regulatory principle" of environmental pollution behavior, following the "balance principle" of fiscal and decentralization powers and adhering to the "differentiation principle" of adapting to local conditions to enhance environmental governance.