Does administrative divisions adjustment affect polluting industries dependence? Evidence from township-town merge in China

Abstract Land distribution is intricately linked to economic quality and sustainable growth, influenced by administrative division adjustment (ADA), which can be categorized into various forms, with the township–town merge (TTM) reform being the most common. This study evaluates the effect of TTM on local governments’ dependence on polluting industries from a fiscal decentralization angle, using the differences-in-differences model with transaction data from China’s land market. Findings reveal that TTM increases local governments’ dependence on polluting industries, especially in districts/counties with weaker economic conditions before the COVID-19 pandemic. Evidence also highlights a notable boundary effect of TTM, though its impact is minimal in districts/counties at provincial borders due to their potentially lower public investment inclination. TTM also increases the decentralization level of districts/counties, thus explaining the increase in local government’s dependence on polluting industries. The empirical results have confirmed such a mechanism. However, top-down supervision limits the effect of the reform to a certain extent. This conclusion offers fresh policy insights for leveraging land supply mechanisms to advance environmental governance in centralized developing nations through the lens of ADA.