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Provincial and Local Governments in China: Fiscal Institutions and Government Behavior

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  • Roger H. Gordon
  • Wei Li

Abstract

What 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 Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16694.

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Date of creation: Jan 2011
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Publication status: published as Provincial and Local Governments in China: Fiscal Institutions and Government Behavior , Roger H. Gordon, Wei Li. in Capitalizing China , Fan and Morck. 2013
Handle: RePEc:nbr:nberwo:16694

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Cited by:
  1. Chang, Zheng, 2014. "Financing new metros—The Beijing metro financing sustainability study," Transport Policy, Elsevier, vol. 32(C), pages 148-155.
  2. 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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