Vertical fiscal imbalances, environmental regulations and resource allocation — in the Chinese context

Vertical fiscal imbalances (VFI) in China have created significant challenges for resource allocation and environmental governance. This study investigates the impact of VFI on resource allocation in Chinese cities. Results show that VFI intensifies resource misallocation, particularly at the provincial compared to the municipal level. And VFI influences resource allocation via informal and formal environmental regulations, with public and administrative regulations mitigating effects, while supervisory regulations exacerbate them. The negative impact of VFI is especially pronounced in declining cities, non-industrial hubs, and regions with severe resource misallocation. Additionally, VFI and resource misallocation demonstrate negative spatial spillover effects. Our findings provide valuable insights into the influence of VFI across different administrative levels in China, highlighting the need for policy reforms to address these fiscal disparities.