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Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style

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Author Info
Hehui Jin
Yingyi Qian
Barry Weingast
Abstract

March 1999

Second generation theories of federalism extend traditional approaches by systematically studying the role of government incentives in economic performance. Providing government with the incentive to promote markets is especially acute for developing economies or those in transition from central planning. In these countries, governments have often been the central barrier to economic development. In this paper, we investigate empirically decentralization and fiscal incentives in the central-provincial relationship during China's reform. We find strong correlations between local government revenue collection and local government expenditure. Further, we show that China's fiscal contracting system provides local governments with strong (marginal) fiscal incentives and at the same time improves horizontal distribution across provinces in budgetary spending. We also find that stronger fiscal incentives — measured in terms of higher marginal revenue retention rate — implies faster development of non-state enterprises and more reform in state-owned enterprises. Finally, we compare federalism, Chinese style, with federalism, Russian style.

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Paper provided by Stanford University, Department of Economics in its series Working Papers with number 99013.

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Date of creation: Mar 1999
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Handle: RePEc:wop:stanec:99013

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Bahl, Roy W. & Wallich, Christine, 1992. "Intergovernmental fiscal relations in China," Policy Research Working Paper Series 863, The World Bank. [Downloadable!]
  2. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416. [Downloadable!] (restricted)
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  4. John McMillan, 1993. "Autonomy and Incentives in Chinese State Enterprises," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich.
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  5. Epple, Dennis & Zelenitz, Allan, 1981. "The Implications of Competition among Jurisdictions: Does Tiebout Need Politics?," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1197-1217, December. [Downloadable!] (restricted)
  6. Frye, Timothy & Shleifer, Andrei, 1997. "The Invisible Hand and the Grabbing Hand," American Economic Review, American Economic Association, vol. 87(2), pages 354-58, May. [Downloadable!] (restricted)
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  7. Qian, Yingyi & Roland, Gerard, 1998. "Federalism and the Soft Budget Constraint," American Economic Review, American Economic Association, vol. 88(5), pages 1143-62, December. [Downloadable!] (restricted)
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  8. Wildasin, David E., 1997. "Externalities and bailouts : hard and soft budget constraints in intergovernmental fiscal relations," Policy Research Working Paper Series 1843, The World Bank. [Downloadable!]
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  9. Shleifer, Andrei, 1997. "Government in transition," European Economic Review, Elsevier, vol. 41(3-5), pages 385-410, April. [Downloadable!] (restricted)
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  10. Freinkman, Lev & Yossifov, Plamen, 1999. "Decentralization in regional fiscal systems in Russia - trends and links to economic performance," Policy Research Working Paper Series 2100, The World Bank. [Downloadable!]
  11. Groves, Theodore, et al, 1994. "Autonomy and Incentives in Chinese State Enterprises," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 183-209, February. [Downloadable!] (restricted)
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  12. Martin L. Weitzman, 1980. "The "Ratchet Principle" and Performance Incentives," Bell Journal of Economics, The RAND Corporation, vol. 11(1), pages 302-308, Spring. [Downloadable!] (restricted)
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  13. Shah, Anwar, 1998. "Fiscal federalism and macroeconomic governance : for better or for worse?," Policy Research Working Paper Series 2005, The World Bank. [Downloadable!]
  14. Hofman, Bert, 1993. "An analysis of Chinese fiscal data over the reform period," China Economic Review, Elsevier, vol. 4(2), pages 213-230. [Downloadable!] (restricted)
  15. Zhang, Tao & Zou, Heng-fu, 1998. "Fiscal decentralization, public spending, and economic growth in China," Journal of Public Economics, Elsevier, vol. 67(2), pages 221-240, February. [Downloadable!] (restricted)
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  16. Ekaterina Zhuravskaya, 2000. "Incentives to provide local public goods: fiscal federalism, Russian style," Working Papers w0001, Center for Economic and Financial Research (CEFIR). [Downloadable!]
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  1. Pranab Bardhan & Dilip Mookherjee, 2005. "Decentralization, Corruption and Government Accountability: An Overview," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series dp-152, Boston University - Department of Economics. [Downloadable!]
    Other versions:
  2. Li Keping & Ehtisham Ahmad & Thomas J. Richardson & Raju Singh, 2002. "Recentralization in China?," IMF Working Papers 02/168, International Monetary Fund. [Downloadable!]
  3. Woo, Wing, 2001. "Recent Claims of China's Economic Exceptionalism: Reflections Inspired by WTO Accession," Working Papers 01-3, University of California at Davis, Department of Economics. [Downloadable!]
  4. Ruben Enikolopov & Ekaterina Zhuravskaya, 2004. "Decentralization and Political Institutions," Economics Working Papers 0045, Institute for Advanced Study, School of Social Science. [Downloadable!]
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  5. Roy Bahl & Jorge Martinez-Vazquez, 2003. "Fiscal Federalism and Economic Reform in China," International Studies Program Working Paper Series, at AYSPS, GSU paper0313, International Studies Program, Andrew Young School of Policy Studies, Georgia State University. [Downloadable!]
  6. Yingyi Qian, 1999. "The Institutional Foundations of China's Market Transition," Working Papers 99011, Stanford University, Department of Economics. [Downloadable!]
  7. ESTEBAN, Sonia & DE FRUTOS, Pablo & PRIETO; Maria Jose, 2008. "Fiscal Decentralization And Economic Growth. Empiric Evidence From A Regional Perspective," Regional and Sectoral Economic Studies, Euro-American Association of Economic Development, vol. 8(1), pages 29-58. [Downloadable!] (restricted)
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