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Does Fiscal Decentralization Increase the Investment Rate? Evidence from Chinese Panel Data

Author

Listed:
  • Qichun He

    (China Economics and Management Academy, Central University of Finance and Economics)

  • Meng Sun

    (Business School, Beijing Normal University)

Abstract

China has one of the highest investment rates in the world, and in 1994, China introduced a new fiscal system. The current study utilizes provincial panel data from the period of 1995-2010 to provide a consistent underlying fiscal regime. The estimation results show that expenditure decentralization has a significant, positive effect on the physical capital investment rate in both least squares dummy variables (LSDV) and system GMM (Generalized method of moments) estimations. In contrast, revenue decentralization has a negative effect on the investment rate. One possible explanation is that China's political centralization has been maintained during its economic decentralization. Since the provincial officials are not elected by local constituents but are rather appointed by the central government, it is rational for provincial officials to raise investment rates to meet the cadre promotion criteria of the central government, be it growth performance, as argued by Blanchard and Shleifer (2001) or revenue collection, identified by Shih et al. (2012).

Suggested Citation

  • Qichun He & Meng Sun, 2018. "Does Fiscal Decentralization Increase the Investment Rate? Evidence from Chinese Panel Data," Annals of Economics and Finance, Society for AEF, vol. 19(1), pages 75-101, May.
    • Handle: RePEc:cuf:journl:y:2018:v:19:i:1:he:sun
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    More about this item

    Keywords

    fiscal decentralization; investment rate; panel data;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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