The Cost of Integration: Fading Urban Boundaries and Government Efficiency in China

ABSTRACT This paper investigates the impact of fading urban boundaries on local government efficiency through a unified theoretical and empirical framework. We develop a Walrasian general equilibrium model to derive a dual‐indicator system for internal administrative and external economic efficiency. Empirically, utilizing the 2014 Yangtze River Economic Belt (YREB) development policy as a quasi‐natural experiment, we employ a Difference‐in‐Differences (DiD) methodology. Our findings reveal a profound trade‐off: while regional integration fosters economic growth and welfare advancement, it significantly undermines local governance. This structural decline is primarily driven by surging public debt necessitated by infrastructure expansion—which drastically increases internal administrative friction—and massive population reallocation that causes severe structural mismatches in public service provision. Fundamentally, this study highlights that the growth premium of regional integration is achieved at the substantial cost of a governance burden.