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Regional Decentralization and the Soft Budget Constraint: The Case of China

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  • Qian, Yingyi
  • Roland, Gérard

Abstract

The majority of enterprises in China are controlled by local governments at the provincial, city, county, township and village levels. We study the effect of regional decentralization on soft budget constraints in these enterprises. We show that fiscal competition under (foreign) capital mobility may be effective in hardening enterprises' budget constraints. Decentralization of monetary authority leads to a softening of local governments' budget constraints, however, as well as those of enterprises. Fiscal decentralization combined with monetary centralization (i.e. fiscal federalism) may achieve not only hard budget constraint but also the objective of monetary restraint. We also examine the effect of labour and product market conditions on soft budget constraints. We apply our model to explain harder budget constraints of the enterprises controlled by lower-level governments of townships and villages in China.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1013.

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Date of creation: Sep 1994
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Handle: RePEc:cpr:ceprdp:1013

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Related research

Keywords: China; Decentralization; Economic Transition; Federalism; Soft Budget Constraint;

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Cited by:
  1. Svensson, Jakob, 2000. "When is foreign aid policy credible? Aid dependence and conditionality," Journal of Development Economics, Elsevier, vol. 61(1), pages 61-84, February.
  2. Torsten Persson & Gerard Roland & Guido Tabellini, . "The Theory of Fiscal Federalism: What Does it Mean for Europe?," Working Papers 101, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  3. Mehrdad Vahabi, 2001. "The Soft Budget Constraint: A Theoretical Clarification," Post-Print hal-00629160, HAL.
  4. Estache, Antonio & Martimort, David, 1999. "Politics, transaction costs, and the design of regulatory institutions," Policy Research Working Paper Series 2073, The World Bank.
  5. Yingyi, Qian & Roland, Gerard, 1996. "The soft budget constraint in China," Japan and the World Economy, Elsevier, vol. 8(2), pages 207-223, June.
  6. Vahabi, Mehrdad, 2003. "La contrainte budgétaire lâche et la théorie économique
    [Soft Budget Constraint and Economic Theory]
    ," MPRA Paper 17651, University Library of Munich, Germany.
  7. David Martimort, 1996. "The multiprincipal nature of government," Working Papers 153244, Institut National de la Recherche Agronomique, France.
  8. Wang, Yijiang & Chang, Chun, 1998. "Economic transition under a semifederalist government: The experience of China," China Economic Review, Elsevier, vol. 9(1), pages 1-23.
  9. Berglof, Erik & Roland, Gerard, 1997. "Soft budget constraints and credit crunches in financial transition," European Economic Review, Elsevier, vol. 41(3-5), pages 807-817, April.

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