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Yardstick competition in a federation: Theory and evidence from China

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  • Caldeira, Emilie

Abstract

In this paper, we test empirically for competition among Chinese provinces embedded in a centralized political system. To motivate the empirical work, we adapt Besley and Case's model (American Economic Review, 1995) to a model of yardstick competition ‘from the top’. In this model, the central government (rather than local voters) creates competition among local officials by rewarding or punishing them on the basis of relative performance in providing public services. Our theoretical framework predicts that, in this context, the central government spurs strategic interactions among governors with similar environments as voters do in democratic countries. Then, for the first time in our knowledge, by estimating a spatial lag dynamic model for a panel data of 29 Chinese provinces from 1980 to 2004, we provide empirical evidence of the existence of such public spending interactions. We propose a rigorous empirical framework which takes into account heterogeneity, endogeneity problems and spatial error dependence. The results tend to confirm the existence of strategic interactions among geographically and economically close Chinese provinces, operating in a vertical bureaucratic control system.

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  • Caldeira, Emilie, 2012. "Yardstick competition in a federation: Theory and evidence from China," China Economic Review, Elsevier, vol. 23(4), pages 878-897.
  • Handle: RePEc:eee:chieco:v:23:y:2012:i:4:p:878-897
    DOI: 10.1016/j.chieco.2012.04.011
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    Cited by:

    1. Masayoshi Hayashi & Wataru Yamamoto, 2017. "Information sharing, neighborhood demarcation, and yardstick competition: an empirical analysis of intergovernmental expenditure interaction in Japan," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(1), pages 134-163, February.
    2. Wang, Ruixin, 2015. "Essays on development economics and public economics," Other publications TiSEM e1779514-5b71-4726-925b-2, Tilburg University, School of Economics and Management.
    3. Jorge Ferreira & Alexandre Alves & Emilie Caldeira, 2016. "Elections and externalities of health expenditures: Spatial patterns and opportunism in the local budget allocation," ERSA conference papers ersa16p933, European Regional Science Association.
    4. Anping Chen & Marlon Boarnet & Mark Partridge & Yongzheng Liu & Jorge Martinez-Vazquez, 2014. "Interjurisdictional Tax Competition In China," Journal of Regional Science, Wiley Blackwell, vol. 54(4), pages 606-628, September.
    5. repec:rfe:zbefri:v:35:y:2017:i:2:p:375-390 is not listed on IDEAS
    6. Yongzheng Liu & Jorge Martinez-Vazquez, 2011. "Public Input Competition, Stackelberg Equilibrium and Optimality," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1123, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    7. repec:gam:jsusta:v:10:y:2018:i:1:p:45-:d:125112 is not listed on IDEAS
    8. Grégoire ROTA-GRAZIOSI & Emilie CALDEIRA, 2014. "La décentralisation dans les pays en développement : une revue de la littérature - Decentralization in developing countries: A literature review," Working Papers 201411, CERDI.
    9. John Knight, 2015. "The Principal-Agent Problem, Economic Growth, Subjective Wellbeing and Social Instability: China’s Effective but Flawed Governance," Economics Series Working Papers 758, University of Oxford, Department of Economics.
    10. Cao, Xun & Kleit, Andrew & Liu, Chuyu, 2016. "Why invest in wind energy? Career incentives and Chinese renewable energy politics," Energy Policy, Elsevier, vol. 99(C), pages 120-131.
    11. repec:cuf:journl:y:2017:v:18:i:1:cheng is not listed on IDEAS
    12. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, vol. 24(2), pages 87-107, June.
    13. Feng, Juan & Lichtenberg, Erik & Ding, Chengri, 2015. "Balancing act: Economic incentives, administrative restrictions, and urban land expansion in China," China Economic Review, Elsevier, vol. 36(C), pages 184-197.
    14. Yu, Jihai & Zhou, Li-An & Zhu, Guozhong, 2016. "Strategic interaction in political competition: Evidence from spatial effects across Chinese cities," Regional Science and Urban Economics, Elsevier, vol. 57(C), pages 23-37.

    More about this item

    Keywords

    Decentralization; China; Public spending interactions; Yardstick competition; Spatial panel data;

    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling

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