# The impact of city-county merger on firm-level total factor productivity—Evidence from China

## TL;DR

This study shows that merging city and county governments in China can reduce the productivity of firms due to increased costs and changes in government behavior.

## Contribution

The paper introduces a theoretical framework and empirical evidence on how city-county mergers negatively affect firm productivity in China.

## Key findings

- City-county mergers significantly reduce firm-level total factor productivity.
- Government financial strain and firm internal conditions mediate the negative effects of the reform.

## Abstract

This study examines the potential negative effects of city-county mergers on firm-level total factor productivity (TFP). A theoretical framework is established to explain how city-county mergers could lead to higher institutional and non-institutional costs, thus influencing government decision-making and resource allocation. As a result, firms operating in the economy will absorb these costs and adjust their behavior accordingly. By employing Chinese firm-level data in a difference-in-differences approach, this study finds a statistically significant negative effect of transitioning county-level cities into municipal districts (TCD) on firm-level productivity. Additionally, this study identifies the financial situation of reformed governments and the internal environment of firms as two mechanisms through which the TCD reform influences firm-level productivity.