Do polluting plants locate in the borders of jurisdictions? Evidence from China

Under decentralized fiscal and environmental governance, local governments have to balance economic growth and environmental pollution through regulatory power. While “free rider effect” directs polluting firms towards jurisdictional borders to export pollution, concerns for economic growth leads polluting firms to stay in regional centers to enjoy agglomeration externality. These two forces work together to shape the spatial pattern of polluting firms. This paper builds a stringency decision model for local governments and proposes a hypothesis relating border effects and the location and production of polluting firms. Based on cross-sectional county level data from the Key National Monitoring Sources of Pollution Firm in China, we conducted Poisson and Tobit regression analyses to test border and agglomeration effects. Empirical results reflect that border effect is not significant both in the location of polluting firms and spatial distribution of dirty output. The findings suggest that local governments lack strong incentives to take advantage of free rider effects when dealing with pollution but value the agglomeration effects to boost economic growth.