Jiayin Hu  Xiaokang Hu  Yuchao Peng  Yingguang Zhang

Abstract

The pursuit of causes with positive externalities is, unfortunately, often constrained by debt burdens. We investigate the environmental costs of debt overhang by examining China’s massive debt restructuring in 2015. Cities with heavier pre-restructuring debt burdens experienced greater improvements in local air quality after their costly debt was swapped for municipal bonds backed by higher-level governments. These patterns cannot be fully explained by tightened top-down environmental regulations or trends driven by initial pollution levels. Previously more debt-constrained cities also saw larger increases in clean energy production, penalties imposed on polluting firms, closures of coal-fired power plants, and green patents filed by listed firms. Our findings underscore the role of public debt constraints in shaping local green transition.
 

Keywords: Debt restructuring, local governments, debt overhang, air pollution

JEL classification: H63, H74, Q51, Q52, Q53, Q58

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