Provincial and Local Governments in China: Fiscal Institutions and Government Behavior
AbstractWhat are the incentives faced by local officials in China? Without democratic institutions, there is no mechanism for local residents to exercise “voice”. Given the hukou registration system, local residents have little opportunity to threaten “exit” if they are unhappy with local taxes and spending. This paper explores an alternative source of incentives, starting from the premise that local officials aim to maximize the jurisdiction’s fiscal residual (profits), equal to local tax revenue minus expenditures on public services. In a Tiebout setting with mobile households, this objective should lead to efficient provision. What happens, though, if firms and economic activity but not people are mobile? The paper examines the incentives faced by local Chinese officials in this context, and argues that the forecasted behavior helps to explain both the successes and the problems arising from local government activity in China.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16694.
Date of creation: Jan 2011
Date of revision:
Publication status: published as Roger H. Gordon, Wei Li. "Provincial and Local Governments in China: Fiscal Institutions and Government Behavior," in Joseph P. H. Fan and Randall Morck, editors, "Capitalizing China" University of Chicago Press (2013)
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Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Other versions of this item:
- Roger H. Gordon & Wei Li, 2011. "Provincial and Local Governments in China: Fiscal Institutions and Government Behavior," NBER Chapters, in: Capitalizing China, pages 337-369 National Bureau of Economic Research, Inc.
- H7 - Public Economics - - State and Local Government; Intergovernmental Relations
- O17 - Economic Development, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
- O38 - Economic Development, Technological Change, and Growth - - Technological Change; Research and Development; Intellectual Property Rights - - - Government Policy
- O53 - Economic Development, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
- P2 - Economic Systems - - Socialist Systems and Transition Economies
- P43 - Economic Systems - - Other Economic Systems - - - Finance; Public Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-30 (All new papers)
- NEP-PBE-2011-01-30 (Public Economics)
- NEP-TRA-2011-01-30 (Transition Economics)
- NEP-URE-2011-01-30 (Urban & Real Estate Economics)
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- Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
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