Spending preferences of local officials with off-budget land revenues of Chinese cities

The paper examines the spending preferences of local governments on land revenues by developing an indirect approach in which public sector outcomes are regressed with land revenues, the most dominant source for off-budget incomes. By doing so, we are able to overcome the issue of unavailable itemized spending data on land revenues. The behavioral foundation of leading local officials on land revenues is that they may be treated as discretionary funds that will be spent on projects that can benefit local officials' political advancements. Thus it is hypothesized that Chinese local officials intend to channel land revenues more toward growth-oriented infrastructure such as urban roads, more toward image projects such as public squares and open space, and more toward projects that help to boost public impression of local economic success on which cadre evaluation weighs heavily. We test those hypotheses using a panel data of Chinese prefecture cities from 1999 to 2006. Econometric estimates confirm those hypotheses.