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Public-Private Partnership and Government Debt

In: Public-Private Partnership and Policy Uncertainty

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  • Weijie Luo

    (Beijing International Studies University)

Abstract

This study analyzes how local governments use external financing instruments to adjust their capital structure. External financing instruments (public debt and public-private partnership [PPP]) have become critical options for most local governments to deal with budget constraints. We construct an indicator of the external financing ratio (EFR) to measure local governments’ dependency on external financing instruments. Based on the pecking order and trade-off capital structure theories, we utilize city-level panel data in China between 2015 and 2019 to investigate the financing strategies of local governments. We report two main findings. First, the financing strategies of China’s local governments follow the pecking order theory. In other words, internal financing has priority over debt and then PPP. Second, consistent with the trade-off theory, China’s local governments continuously adjust to a target EFR. In addition, compared with debt financing, the adjustment of PPP financing is relatively inelastic. Our study emphasizes the importance of public financial management reinforced by local governments to prevent fiscal risks in the context of intensified financial stress.

Suggested Citation

  • Weijie Luo, 2025. "Public-Private Partnership and Government Debt," Springer Books, in: Public-Private Partnership and Policy Uncertainty, chapter 0, pages 129-153, Springer.
    • Handle: RePEc:spr:sprchp:978-981-96-8074-0_8
    DOI: 10.1007/978-981-96-8074-0_8
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