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Fiscal decentralization, collusion and government size in China's transitional economy

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  • Chien-Hsun Chen

Abstract

This paper examines the public sector in China's transitional economy, with the aim of testing the validity of a variety of hypotheses, namely the Brennan and Buchanan (1980, The Power to Tax: Analytical Foundations of a Fiscal Constitution, CUP, Cambridge); Oates-Wallis (1985, American Economic Review, 75(4) 748-57) version of the decentralization hypothesis and the Brennan and Buchanan collusion hypothesis, on the impact of fiscal decentralization at the provincial level. Pooled cross-section (province) and time-series data are employed with the period under consideration being 1986-1998. An error components technique is also used for the empirical testing. The empirical results provide evidence to support both the Oates-Wallis hypothesis and the collusion hypothesis that an increase in fiscal decentralization leads to a higher level of provincial government expenditure. The study also finds that the central and provincial governments are provided with an incentive to form collusive agreements through extra-budgetary funds.

Suggested Citation

  • Chien-Hsun Chen, 2004. "Fiscal decentralization, collusion and government size in China's transitional economy," Applied Economics Letters, Taylor & Francis Journals, vol. 11(11), pages 699-705.
  • Handle: RePEc:taf:apeclt:v:11:y:2004:i:11:p:699-705 DOI: 10.1080/1350485042000236557
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    References listed on IDEAS

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    1. Yingyi Qian & Gerard Roland, "undated". "Federalism and the Soft Budget Constraint," Working Papers 97045, Stanford University, Department of Economics.
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    Cited by:

    1. Yingxin Shi & Mototsugu Fukushige, 2015. "Long-Run Fiscal Multipliers for Autonomous Prefectures in China," Pacific Economic Review, Wiley Blackwell, vol. 20(5), pages 687-695, December.
    2. Mototsugu Fukushige & Yingxin Shi, 2013. "Intergovernmental Fiscal Relationships in China: A Simple Model Based on the Nonsymmetric Nash Solution," Discussion Papers in Economics and Business 13-21, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    3. Elliott Parker & Judith Thornton, 2007. "Fiscal Centralisation and Decentralisation in Russia and China," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 49(4), pages 514-542, December.
    4. Philip Gunby & Yinghua Jin, 2016. "Determinants of Chinese Government Size: An Extreme Bounds Analysis," Working Papers in Economics 16/25, University of Canterbury, Department of Economics and Finance.
    5. Alfred Wu & Mi Lin, 2012. "Determinants of government size: evidence from China," Public Choice, Springer, vol. 151(1), pages 255-270, April.
    6. Jia, Junxue & Guo, Qingwang & Zhang, Jing, 2014. "Fiscal decentralization and local expenditure policy in China," China Economic Review, Elsevier, vol. 28(C), pages 107-122.
    7. Wang, Zhiguo & Ma, Liang, 2012. "New Development of Fiscal Decentralization in China," MPRA Paper 36918, University Library of Munich, Germany.
    8. Zhiguo Wang & Liang Ma, 2014. "Fiscal Decentralization in China: A Literature Review," Annals of Economics and Finance, Society for AEF, vol. 15(1), pages 51-65, May.

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