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Regional decentralization and fiscal incentives: Federalism, Chinese style

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  • Jin, Hehui
  • Qian, Yingyi
  • Weingast, Barry R.

Abstract

March 1999 Second generation theories of federalism extend traditional approaches by systematically studying the role of government incentives in economic performance. Providing government with the incentive to promote markets is especially acute for developing economies or those in transition from central planning. In these countries, governments have often been the central barrier to economic development. In this paper, we investigate empirically decentralization and fiscal incentives in the central-provincial relationship during China's reform. We find strong correlations between local government revenue collection and local government expenditure. Further, we show that China's fiscal contracting system provides local governments with strong (marginal) fiscal incentives and at the same time improves horizontal distribution across provinces in budgetary spending. We also find that stronger fiscal incentives — measured in terms of higher marginal revenue retention rate — implies faster development of non-state enterprises and more reform in state-owned enterprises. Finally, we compare federalism, Chinese style, with federalism, Russian style.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 89 (2005)
Issue (Month): 9-10 (September)
Pages: 1719-1742

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Handle: RePEc:eee:pubeco:v:89:y:2005:i:9-10:p:1719-1742

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Web page: http://www.elsevier.com/locate/inca/505578

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References

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  1. M. Weitzman, 1979. "The 'Ratchet Principle' and Performance Incentives," Working papers 239, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Yingyi Qian & Gerard Roland, . "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
  3. Ekaterina Zhuravskaya, 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Working Papers w0001, Center for Economic and Financial Research (CEFIR).
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  5. Bahl, Roy W. & Wallich, Christine, 1992. "Intergovernmental fiscal relations in China," Policy Research Working Paper Series 863, The World Bank.
  6. Kornai, Janos, 1986. "The Soft Budget Constraint," Kyklos, Wiley Blackwell, vol. 39(1), pages 3-30.
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  9. Shleifer, Andrei, 1997. "Government in transition," European Economic Review, Elsevier, vol. 41(3-5), pages 385-410, April.
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  11. Epple, Dennis & Zelenitz, Allan, 1981. "The Implications of Competition among Jurisdictions: Does Tiebout Need Politics?," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1197-1217, December.
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  13. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank.
  14. Yingyi Qian & Barry R. Weingast, 1996. "China's transition to markets: market-preserving federalism, chinese style," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 1(2), pages 149-185.
  15. John Knight & Li Shi, 1999. "Fiscal decentralization: Incentives, redistribution and reform in China," Oxford Development Studies, Taylor & Francis Journals, vol. 27(1), pages 5-32.
  16. Olivier Blanchard & Andrei Shleifer, 2001. "Federalism With and Without Political Centralization: China Versus Russia," IMF Staff Papers, Palgrave Macmillan, vol. 48(4), pages 8.
  17. Groves, Theodore, et al, 1994. "Autonomy and Incentives in Chinese State Enterprises," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 183-209, February.
  18. Timothy Frye & Andrei Shleifer, 1996. "The Invisible Hand and the Grabbing Hand," NBER Working Papers 5856, National Bureau of Economic Research, Inc.
  19. Freinkman, Lev & Yossifov, Plamen, 1999. "Decentralization in regional fiscal systems in Russia - trends and links to economic performance," Policy Research Working Paper Series 2100, The World Bank.
  20. Lavrov, Aleksei & Litwack, John & Sutherland, Douglas, 2001. "Fiscal federalist relations in Russia: a case for subnational autonomy," MPRA Paper 26537, University Library of Munich, Germany.
  21. Hofman, Bert, 1993. "An analysis of Chinese fiscal data over the reform period," China Economic Review, Elsevier, vol. 4(2), pages 213-230.
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