Fiscal spending and air pollution in Chinese cities: Identifying composition and technique effects

Fiscal spending has both direct and indirect impact on the environment. Using city-level data in China, this paper investigates if education spending affects air pollution through human capital accumulation, known as the composition effect, and if R&D spending affects air pollution through clean-technology adoption, known as the technique effect. Contrasting theoretical predictions and previous empirical evidence, we find both effects of interest to be trivial in urban China. Composition effect appears to be slightly stronger relative to technique effect, while sub-sample analyses show some regional heterogeneities. The results remain robust when we switch between pollution measurements, examine only the regional central cities, instrument endogenous covariates, and adopt the spatial settings. We further discuss potential channel-blocking mechanisms that lead to weak estimates.