Public Expenditure and Green Total Factor Productivity: Evidence from Chinese Prefecture-Level Cities

Abstract

Whilst effective public expenditure policies are essential for transforming the traditional factor-driven economy into a green and innovation-driven economy, the impacts of public expenditure’s size and composition on green economic development have not been comprehensively investigated. This paper attempts to fill this research gap. Based on the data of Chinese prefecture-level cities from 2010 to 2018, we first measure green total factor productivity (GTFP), the proxy variable for green development, and briefly analyze its spatial-temporal trends. Then, using the dynamic panel models, dynamic panel mediation models, and dynamic panel threshold models, we evaluate how public expenditure affects GTFP. The main findings are fourfold: (1) there is a significant inverted U-shaped relationship between the expenditure size and GTFP. (2) The expansion of social expenditures and science and technology (S&T) and environmental protection expenditures play an important role in stimulating green growth, while economic expenditures and administrative expenditures have adverse effects. (3) Public expenditure mainly promotes green development through four channels: human capital accumulation, technological innovation, environmental quality improvement, and labor productivity increase. (4) The expenditure composition influences the turning point of the inverted U-shaped relationship. Based on these findings, we propose some targeted policy suggestions to promote green development.