Decentralization and air pollution: Unintended environmental consequences of China’s fiscal hierarchy reform

This study examines the unintended environmental consequences of a hierarchical fiscal reform in China and their broader economic implications. Focusing on the Province-Managing-County (PMC) reform, which flattened the fiscal hierarchy by bypassing prefectures in budgetary matters, we exploit its staggered rollout and apply a Difference-in-Differences strategy to county-level panel data from 2000 to 2012. The results show that the reform significantly increased annual average PM2.5 concentrations, indicating a deterioration in local air quality. Moreover, rather than a growth–pollution trade-off, GDP per capita also declined in treated counties, suggesting that the policy imposed both environmental and economic costs. These adverse effects were more pronounced in provinces with a larger initial span of control, consistent with weakened oversight under broader supervisory burdens. Mechanism analysis indicates that the reform reshaped county-level fiscal priorities, reducing investments in environmental protection and development while increasing administrative expenditures. At the firm level, regulatory enforcement weakened, leading to greater emissions and reduced adoption of pollution control technologies. Overall, the findings highlight the risks of decentralization reforms implemented without commensurate monitoring capacity, particularly in governance systems with limited administrative bandwidth.