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Yardstick competition in a Federation: Theory and Evidence from China

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  • Emilie CALDEIRA

    () (Université d'Auvergne(UdA))

Abstract

While some scholars argue that fiscal decentralization gave Chinese local officials strong incentives to promote local economic growth, traditional fiscal federalism theories are not directly relevant to explain such an effect in the particular context of China. In this paper, we explain the existence of interjurisdictional competition among Chinese local officials using a model of yardstick competition "from the top", in which the central government (and not local voters) creates a competition among local officials by rewarding or punishing them on the basis of relative economic performance. Our model predicts that, in this context, local governments are forced to care about what other incumbents are doing and that public spending settings are strategic complements. Then, by estimating a spatial lag dynamic model for a panel data of 29 Chinese provinces from 1980 to 2004, we provide empirical evidence of the existence of such public spending interactions. We propose a rigorous empirical framework which takes into account heterogeneity, simultaneity and endogeneity problems and spatial error dependence. The results are encouraging to the view that there are some strategic interactions among Chinese provinces, resulting from a yardstick competition created by the central government.

Suggested Citation

  • Emilie CALDEIRA, 2010. "Yardstick competition in a Federation: Theory and Evidence from China," Working Papers 201018, CERDI.
  • Handle: RePEc:cdi:wpaper:1168
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    Cited by:

    1. Jorge Ferreira & Alexandre Alves & Emilie Caldeira, 2016. "Elections and externalities of health expenditures: Spatial patterns and opportunism in the local budget allocation," ERSA conference papers ersa16p933, European Regional Science Association.
    2. Anping Chen & Marlon Boarnet & Mark Partridge & Yongzheng Liu & Jorge Martinez-Vazquez, 2014. "Interjurisdictional Tax Competition In China," Journal of Regional Science, Wiley Blackwell, vol. 54(4), pages 606-628, September.
    3. Cao, Xun & Kleit, Andrew & Liu, Chuyu, 2016. "Why invest in wind energy? Career incentives and Chinese renewable energy politics," Energy Policy, Elsevier, vol. 99(C), pages 120-131.
    4. Grégoire ROTA-GRAZIOSI & Emilie CALDEIRA, 2014. "La décentralisation dans les pays en développement : une revue de la littérature - Decentralization in developing countries: A literature review," Working Papers 201411, CERDI.
    5. Feng, Juan & Lichtenberg, Erik & Ding, Chengri, 2015. "Balancing act: Economic incentives, administrative restrictions, and urban land expansion in China," China Economic Review, Elsevier, vol. 36(C), pages 184-197.
    6. Pierre Salmon, 2013. "Decentralization and growth: what if the cross-jurisdiction approach had met a dead end?," Constitutional Political Economy, Springer, vol. 24(2), pages 87-107, June.
    7. Masayoshi Hayashi & Wataru Yamamoto, 2017. "Information sharing, neighborhood demarcation, and yardstick competition: an empirical analysis of intergovernmental expenditure interaction in Japan," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 24(1), pages 134-163, February.
    8. Wang, Ruixin, 2015. "Essays on development economics and public economics," Other publications TiSEM e1779514-5b71-4726-925b-2, Tilburg University, School of Economics and Management.
    9. repec:rfe:zbefri:v:35:y:2017:i:2:p:375-390 is not listed on IDEAS
    10. Yongzheng Liu & Jorge Martinez-Vazquez, 2011. "Public Input Competition, Stackelberg Equilibrium and Optimality," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper1123, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
    11. John Knight, 2015. "The Principal-Agent Problem, Economic Growth, Subjective Wellbeing and Social Instability: China’s Effective but Flawed Governance," Economics Series Working Papers 758, University of Oxford, Department of Economics.
    12. repec:cuf:journl:y:2017:v:18:i:1:cheng is not listed on IDEAS
    13. Yu, Jihai & Zhou, Li-An & Zhu, Guozhong, 2016. "Strategic interaction in political competition: Evidence from spatial effects across Chinese cities," Regional Science and Urban Economics, Elsevier, vol. 57(C), pages 23-37.

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    Keywords

    Decentralization; China; Public spending interactions; Yardstick competition; Spatial panel data;

    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior

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