Industrial agglomeration externalities, local governments’ competition and environmental pollution: Evidence from Chinese prefecture-level cities

Abstract Given the important economic role played by local governments in the development of industries in China, this paper incorporates the competition behaviors of local governments into the analytical framework of environmental externalities of industrial agglomeration; accordingly, it theoretically explores the environmental externalities that may arise from industrial agglomeration induced by local governments' competition. On the basis of panel data covering 282 Chinese prefecture-level cities from 2007 to 2016, this paper uses spatial econometric methods to test the impact of the interaction between industrial agglomeration and local governments' competition on environmental pollution and spatial spillover effects. The empirical test results show that, compared with simple industrial agglomeration, the combination of industrial agglomeration and local governments' competition is the key factor explaining the current changes in the environmental pollution level and that the interaction between industrial agglomeration mode and local government competitive behaviors aggravates environmental pollution. Among them, the interaction between specialized agglomeration and local governments' tax competition exerts negative externalities on the environment through the overcrowding effect, while the interaction between diversified agglomeration and local governments' investment competition has negative externalities on the environment through the centralized emission effect. Both have significant spatial spillover effects. Adjacent regions will form a larger-scale overcrowding effect and concentrated emission effect under the joint influence of the “race to the bottom” competitive strategy interaction and related industries. Lastly, based on our research conclusion, this paper proposes some policy suggestions to optimize local governments’ competitive behaviors and industrial agglomeration and other market forces to jointly control environmental pollution.