Regional decentralization and fiscal incentives: Federalism,Chinese style |
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| Institution: | 1. School of Finance, China Financial Policy Research Center, Renmin University of China, No. 59 Zhongguancun Street, Haidian District, Beijing 100872, China\n;2. Department of Economics, Tulane University, 208 Tilton Hall, New Orleans, LA 70118, USA\n;1. National Center for Smart Growth & Urban Studies and Planning Program, University of Maryland, College Park, MD 20742, United States;2. Capital University of Economics and Business, Beijing, PR China;3. International School of Economics and Management, Capital University of Economics and Business, Beijing, PR China;4. Department of Agricultural and Resource Economics, University of Maryland, College Park, United States;1. Department of Public Finance and Wang Yanan Institute for Studies in Economics, Xiamen University, Xiamen 361005, China;2. Department of Economics, National University of Singapore, 1 Arts Link, Singapore 117570, Singapore;3. Division of Social Science, Hong Kong University of Science and Technology, Clear Water Bay, Hong Kong;1. Department of Economics, Fudan University, China;2. Department of Economics, Chinese University of Hong Kong, Hong Kong;3. Department of Economics, Hong Kong University of Science and Technology, Hong Kong |
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| Abstract: | Aligning the interests of local governments with market development is an important issue for developing and transition economies. Using a panel data set from China, we investigate the relationship between provincial government's fiscal incentives and provincial market development. We report three empirical findings. First, we find that during the period of “fiscal contracting system” the discrepancy between ex ante contracts and ex post implementation was relatively small, suggesting that the fiscal contracts were credible. Second, we find a much higher correlation, about four times, between the provincial government's budgetary revenue and its expenditure during 1980s and 1990s as compared to 1970s, demonstrating that provincial governments faced much stronger ex post fiscal incentives after reform. Third, we find that stronger ex ante fiscal incentives, measured by the contractual marginal retention rate of the provincial government in its budgetary revenue, are associated with faster development of the non-state sector as well as more reforms in the state sector in the provincial economy. This holds even when we control for the conventional measure of fiscal decentralization. Finally, we compare federalism, Chinese style, to federalism, Russian style. |
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