Administrative division adjustment and environmental pollution: Evidence from City-County Mergers in China

For countries such as China, where market segmentation is widespread, the introduction of administrative division adjustments is expected to facilitate interregional integration. In this study, we investigate the effects of city-county mergers (CCM) on environmental pollution. We propose two different integrations resulting from CCM: economic and political integration. Economic integration may lead to a "scale expansion effect" on firms by weakening market segmentation, which may hurt the local environment. Political integration, by curbing the autonomy the merged county, while concurrently enhancing the governance capacity of the city government which is typically more inclined to enforce rigorous environmental regulations than county-level governments, would strengthen local environmental regulation. This, in turn, benefits the local environment, a phenomenon coined as the "regulation strengthening effect." Empirically, we find that CCM could significantly lower local pollution, and it is largely the result of cleaner energy use. Additionally, decomposition analysis reveals that the improvement in energy efficiency largely results from the between-firm component of surviving firms and the entry of new, more energy-efficient firms.