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Transfers-based Decentralization, Local Endowment and Public Employment: A theoretical inquiry and empirical evidence from China

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Author Info

  • Fei Yuan

    (Chinese Academy of Social Sciences)

  • Ran Tao

    (Chinese Academy of Social Sciences)

  • Zhigang Xu

    (Chinese Academy of Social Sciences)

  • Mingxing Liu

    (Peking University)

  • Heng-fu Zou

    (Central University of Finance and Economics
    Wuhan University
    the World Bank)

  • Chunli Shen

    (University of Maryland)

Abstract

Based on the theoretical literature of fiscal decentralization, we discuss the political economy of inter-governmental fiscal arrangements in China and examine how a transfer-based decentralization impacts on local public employment. A theoretical model is built to show that compared to their counterparts in better-endowed localities, local governments in worse-endowed localities that are more heavily dependent on upper level fiscal transfers to finance their spending have higher incentives to increase public employment to build local political support rather than invest in growth-promoting public goods. Using a county-level panel data set from 1994 to 2003, we empirically identify the causality from higher transfer dependency to the expansion of public employment with an instrumental variable approach. It is argued that under a governance regime in which local governments are more accountable to the upper level than to local constituency, transfer-based decentralization, either through general-purpose transfer or through earmarked transfer, would both lead to serious problems. The policy implication is that expenditure decentralization needs to be accompanied by both revenue and political decentralization to achieve better local governance outcomes.

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Bibliographic Info

Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 333.

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Length: 48 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:cuf:wpaper:333

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Web page: http://cema.cufe.edu.cn/
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Related research

Keywords: Local endowment; transfers-based decentralization; public employment expansion;

References

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  1. Alberto Alesina & Stephan Danninger & Massimo Rostagno, 1999. "Redistribution Through Public Employment: The Case of Italy," NBER Working Papers 7387, National Bureau of Economic Research, Inc.
  2. Philip J. Grossman, 1989. "Fiscal Decentralization and Government Size: An Extension," Development Research Unit Working Paper Series archive-05, Monash University, Department of Economics.
  3. Hehui Jin & Yingyi Qian & Barry Weingast, 1999. "Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style," Working Papers 99013, Stanford University, Department of Economics.
  4. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
  5. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
  6. Keen, M. & Marchand, M., . "Fiscal competition and the pattern of public spending," CORE Discussion Papers RP -1284, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. Zhihua Zhang & Jorge Martinez-Vazquez, 2003. "The System of Equalization Transfers in China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0312, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  8. Fisman, Raymond & Gatti, Roberta, 2002. "Decentralization and corruption: evidence across countries," Journal of Public Economics, Elsevier, vol. 83(3), pages 325-345, March.
  9. Tsui, Kai-yuen, 2005. "Local tax system, intergovernmental transfers and China's local fiscal disparities," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 173-196, March.
  10. Park, Albert & Wang, Sangui & Wu, Guobao, 2002. "Regional poverty targeting in China," Journal of Public Economics, Elsevier, vol. 86(1), pages 123-153, October.
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