Governments’ Fiscal Squeeze and Firms’ Pollution Emissions: Evidence from a Natural Experiment in China

Dongmin Kong () and Ling Zhu ()
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Dongmin Kong: Huazhong University of Science and Technology
Ling Zhu: Huazhong University of Science and Technology

Environmental & Resource Economics, 2022, vol. 81, issue 4, No 7, 833-866

Abstract: Abstract We investigate whether and how government fiscal squeeze affects local firms’ pollution emissions. To establish causality, we introduce a policy shock in China, namely, the canceling of agricultural taxes in 2005, to document that governments’ fiscal squeeze due to sudden tax decreases substantially increases local firms’ emission by approximately 4%. Mechanism analyses show that local fiscal squeeze result in aggravating pollution emissions through inducing the reduction of firms’ efforts on green innovation and abatement activities. Cross-sectionally, the effects of local government fiscal squeeze on pollution emissions are mitigated by environmental regulation, marketization development, but strengthened by firm financial pressure.

Keywords: Government fiscal squeeze; Agricultural tax reform; Firm emission; Environment quality; China (search for similar items in EconPapers)
JEL-codes: Q52 Q58 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (15)

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DOI: 10.1007/s10640-022-00656-3

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