Can Judicial Centralization Reduce Transboundary Pollution? Firm-Level Evidence from China's Environmental Courts

Transboundary pollution is a persistent governance failure in decentralized systems, where fiscal and political incentives lead local governments to shield polluting enterprises from cross-jurisdictional accountability. Exploiting the staggered establishment of prefecture-level environmental courts in China as a quasi-natural experiment, we combine a regression discontinuity design with staggered difference-in-differences estimation to identify high-pollution zones near county-level boundaries and to assess whether judicial centralization mitigates this externality. Using firm-level data from Chinese industrial enterprises, we find that these high-pollution zones have an average width of 17.108 kilometers and that the establishment of environmental courts significantly reduces industrial wastewater discharge within them. The effects operate through two channels: improving factor allocation efficiency by weakening localized judicial protection of polluting enterprises, and strengthening green innovation incentives by raising the expected legal costs of illegal emissions. Heterogeneity analysis reveals stronger effects in regions with more stringent administrative enforcement, along coastal city boundaries, and among pollution-intensive border-zone firms.