The impact of environmental regulation efficiency loss on inclusive growth: Evidence from China

This study uses panel data from 281 cities in China during the period 2004-2016 and the two-regime spatial Durbin model to investigate the strategic interactions of environmental regulation efficiency loss between cities. It adopts the spatial lag of X model and the mediating effect model to analyze the effect and mechanisms of environmental regulation efficiency loss on inclusive growth. The results show that there are asymmetric strategic interactions in the form of imitative competition and upward competition between geographically neighboring cities, which exacerbates the environmental regulation efficiency loss. The environmental regulation efficiency loss of local and neighboring cities inhibits inclusive growth at both the national and regional levels. At the regional level, the local and neighbor effects are the strongest in the central and western regions. The results also show that the inhibition of the neighbor effect is more obvious within 500 km and is relatively stable after 2007. Revenue decentralization, fiscal autonomy, and promotion pressure have a partial mediating effect, which may be important channels for the environmental regulation efficiency loss to restrain inclusive growth. However, expenditure decentralization plays a masking effect, which mitigates the inhibition of the environmental regulation efficiency loss on inclusive growth. In addition, the robustness test of the informal environmental regulation efficiency loss supports the conclusions of the formal environmental regulation efficiency loss. Moreover, the inhibitions of the two are similar at the national level but are different at the regional level. This study therefore suggests that policymakers should adopt a series of measures to improve environmental regulation efficiency, in addition to increasing environmental regulation intensity.