Fiscal decentralization and local expenditure policy in China |
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| Affiliation: | 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. China Economics and Management Academy, Central University of Finance and Economics, No. 39 South College Road, Haidian District, Beijing 100081, China;2. School of Economics and Business Administration, Beijing Normal University, No. 19 XinJieKouWai St., Haidian District, Beijing 100875, China;1. Department of Economics and Trade, Hunan University, Yuelu District, Changsha, China;2. School of Art and Architecture, Central South Universtiy, Yuelu District, Changsha, China |
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| Abstract: | Since the tax-sharing reform in 1994, the Chinese fiscal system has exhibited a marked vertical fiscal imbalance—a mismatch between expenditure and revenue assignments—at the local levels, which may cause the common-pool problem in local governments' behavior. Using a large fiscal dataset at the county level from 1997 to 2006, this paper studies the effects of fiscal decentralization on local expenditure policy and analyzes how the vertical fiscal imbalance shapes these effects. The estimation results show that expenditure decentralization increases government spending and leads to a fund allocation with a larger weight on capital construction and smaller weights on education and administration. In contrast, revenue decentralization has little influence on local government expenditures. We show that the differences in the effects of expenditure and revenue decentralization can be attributed to the distortionary effects caused by the vertical fiscal imbalance and, thus, offer support to the importance of the common-pool problem at the county level of China's fiscal system. |
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