Who benefits from green fiscal flows? Unpacking the inequality effects of vertical and horizontal ecological fiscal transfers

Differences in the institutional designs of vertical ecological transfers (VET) and horizontal ecological transfers (HET) result in distinct incentive effects and distributional outcomes. This paper examines the Xin'an River in China to compare the impacts and mechanisms of centrally managed VET and locally negotiated HET on household income distribution. Using micro-survey data from 1239 rural households, the study finds that HET significantly boosts the incomes of low- to middle-income households, thereby reducing income inequality. In contrast, VET primarily benefits middle-income households without significant equalizing effects. Decomposition analysis indicates that the equalizing impact of HET stems principally from differences in resource return structures rather than household resource endowments. The theoretical model suggests that the universal design of VET generates mainly direct income effects with limited adjustments in factor allocation. Conversely, performance-oriented HET incentivizes low-income households to transition from less productive agricultural activities, adjust cropping patterns and labor allocation, and diversify income sources. Our findings offer micro-level insights into the policy design of EFT, highlighting pathways to concurrently achieve ecological effectiveness and equitable rural development.