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Does Competition for Capital Discipline Governments? The Role of Fiscal Equalization

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  • Yongzheng Liu

    () (School of Finance, China Financial Policy Research Center Renmin University of China)

Abstract

This paper examines how a scal equalization system a ects the disciplining e ect of competition for capital among heterogeneous regions in a decentralized economy. I build a model in which regions that are heterogeneous in initial endowments try to attract capital by competing public input that enhances the productivity of capital; meanwhile, a scal equalization system is imposed by the central government to reduce regional disparities in scal capacity. The key prediction, borne out in data from the German equalization system, is that while competition for capital strengthens discipline in the well-endowed regions, it weakens discipline in the poorly-endowed regions. However, a conventional equalization transfer scheme, common to many countries, can be e ective in correcting the distortion driven by the heterogeneity of initial endowments across competing regions.

Suggested Citation

  • Yongzheng Liu, 2014. "Does Competition for Capital Discipline Governments? The Role of Fiscal Equalization," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1404, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper1404
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    1. repec:kap:itaxpf:v:24:y:2017:i:2:d:10.1007_s10797-016-9416-1 is not listed on IDEAS
    2. Yongzheng Liu, 2016. "Do government preferences matter for tax competition?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(2), pages 343-367, April.
    3. Yongzheng Liu & Jorge Martinez-Vazquez & Alfred M. Wu, 2017. "Fiscal decentralization, equalization, and intra-provincial inequality in China," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(2), pages 248-281, April.
    4. Yang Chen & Juan Cuestas & Paulo Regis, 2014. "Corporate Tax Convergence in Asian and Pacific Economies," TUT Economic Research Series 17, Department of Finance and Economics, Tallinn University of Technology.

    More about this item

    Keywords

    Fiscal competition; disciplining e ect; scal equalization; system GMM;

    JEL classification:

    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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