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Balancing efficiency and equity in fiscal decentralization: theory and evidence from China

Author

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  • Chen, Yixin
  • Lyu, Bingyang
  • Niu, Mengqi

Abstract

Fiscal decentralization is widely acknowledged as a pivotal contributor to China’s economic growth. However, there is a paucity of literature examining the underlying drivers of fiscal decentralization in China. This paper examines the drivers of intergovernmental fiscal relations in China: fostering economic development and mitigating regional disparities. After reviewing the evolution of the fiscal system since the Reform and Opening Up, we build a theoretical model to shed light on the objectives of fiscal decentralization and derive two theoretical propositions. By using panel data of prefecture-level cities from 2004 to 2016 and incorporating a newly developed fiscal decentralization indicator, we empirically test the theoretical propositions. The empirical analysis shows that the degree of fiscal decentralization decreases with an increase in GDP growth goals or larger fiscal disparities of subordinate county-level governments. This paper not only shows that balancing efficiency and equity in determining fiscal decentralization, but also offers insights for developing countries on how to build a more effective fiscal decentralization system.

Suggested Citation

  • Chen, Yixin & Lyu, Bingyang & Niu, Mengqi, 2026. "Balancing efficiency and equity in fiscal decentralization: theory and evidence from China," World Development, Elsevier, vol. 199(C).
    • Handle: RePEc:eee:wdevel:v:199:y:2026:i:c:s0305750x25003122
    DOI: 10.1016/j.worlddev.2025.107226
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    Keywords

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    JEL classification:

    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • R51 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Finance in Urban and Rural Economies

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