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The Incentive Role of Creating "Cities" in China

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  • Li, Lixing

Abstract

This paper examines a distinctive mechanism of providing incentives to local governments – upgrading counties to "cities". In China, awarding city status to existing counties is the dominant way of creating new urban administrative units, during which the local government gets many benefits. Using a large panel data set covering all counties in China during 1993-2004, I investigate the determinants of upgrading. I find that the official minimum requirements for upgrading are not enforced in practice. Instead, economic growth rate plays a key role in obtaining city status. An empirical test is then conducted to distinguish between a principal-agent incentive mechanism and political bargaining. The findings are consistent with the hypothesis that the central government uses upgrading to reward local officials for high growth, as well as aligning local interests with those of the center. This paper highlights the importance of both fiscal and political incentives facing the local government. The comparison between incentive mechanism and bargaining sheds light on an important question about China’s politics of governance: where does power lie in China?

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 8594.

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Date of creation: Apr 2008
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Handle: RePEc:pra:mprapa:8594

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Keywords: economic growth; incentive mechanism; bargaining; political centralization; fiscal decentralization; county-to-city upgrading; central-local relationship;

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Citations

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Cited by:
  1. Fan, Shenggen & Li, Lixing & Zhang, Xiaobo, 2012. "Challenges of creating cities in China: Lessons from a short-lived county-to-city upgrading policy," Journal of Comparative Economics, Elsevier, Elsevier, vol. 40(3), pages 476-491.
  2. Emilie CALDEIRA, 2010. "Yardstick competition in a Federation: Theory and Evidence from China," Working Papers, CERDI 201018, CERDI.
  3. Chenggang Xu, 2011. "The Fundamental Institutions of China's Reforms and Development," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 49(4), pages 1076-1151, December.
  4. Che, Yi, 2009. "Mismatch: land reallocations, recovery land rental and land rental market development in rural China," MPRA Paper, University Library of Munich, Germany 39794, University Library of Munich, Germany.
  5. Xu, Cheng-Gang, 2010. "The Institutional Foundations of China’s Reforms and Development," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7654, C.E.P.R. Discussion Papers.

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