Environmental effect of decentralization on water quality near the border of cities: Evidence from China's Province-managing-county reform.

This study examines the environmental effects of decentralization on water quality in Chinese counties near the border of cities using data from local monitoring stations. Applying the generalized difference-in-difference-in-differences method, this analysis takes the province-managing-county reform as a quasi-natural experiment for decentralization and shows that four indexes of water quality in reformed counties near city borders are 10%-20% better than that of otherwise identical counties. This study suggests that the reform has a positive effect on environments near borders, which is attributed to the mitigation effect of increased public revenue, the mechanization effect of mechanized agriculture, and the home market effect of a narrowed market. By providing an intensive analysis of the three mechanisms, the paper implies that a well-designed decentralization reform can benefit the environment in addition to meeting its economic goals.