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Fiscal Decentralization and Interregional Capital Misallocation: Evidence from China

Author

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  • Zheng Li

    (School of Economics and Finance, Xi’an Jiaotong University, China)

  • Jorge Martinez-Vazquez

    () (International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State Univeristy)

Abstract

Misallocation of factors of production has been recently viewed as a promising explanation accounting for the large difference in total factor productivity (TFP) across countries. This paper differs from previous studies by concentrating on interregional capital misallocation and by focusing on the role of fiscal decentralization in shaping misallocation. Using a municipal level panel data set, we measure intra-provincial and inter-municipal capital misallocation in China over 2003-2015. The empirical results based on provincial level panel data suggest that revenue decentralization mitigates interregional misallocation while expenditure decentralization fails to exert a significant impact. We further find that this positive effect is more significant and much larger when it is the market rather than government intervention that is driving the flow of capital. The results are robust to different specifications, IV estimations and alternative measurement of interregional misallocation. Our study complements the literature on the causes of misallocation and enriches the understanding of the consequences of fiscal decentralization, especially in terms of economic growth and interregional inequality.

Suggested Citation

  • Zheng Li & Jorge Martinez-Vazquez, 2018. "Fiscal Decentralization and Interregional Capital Misallocation: Evidence from China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1816, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  • Handle: RePEc:ays:ispwps:paper1816
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    File URL: https://icepp.gsu.edu/files/2018/09/paper1816.1.pdf
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    References listed on IDEAS

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