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Regional Decentralization and the Soft Budget Constraint: The Case of China

Author

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  • Qian, Yingyi
  • Roland, Gérard

Abstract

The majority of enterprises in China are controlled by local governments at the provincial, city, county, township and village levels. We study the effect of regional decentralization on soft budget constraints in these enterprises. We show that fiscal competition under (foreign) capital mobility may be effective in hardening enterprises' budget constraints. Decentralization of monetary authority leads to a softening of local governments' budget constraints, however, as well as those of enterprises. Fiscal decentralization combined with monetary centralization (i.e. fiscal federalism) may achieve not only hard budget constraint but also the objective of monetary restraint. We also examine the effect of labour and product market conditions on soft budget constraints. We apply our model to explain harder budget constraints of the enterprises controlled by lower-level governments of townships and villages in China.

Suggested Citation

  • Qian, Yingyi & Roland, Gérard, 1994. "Regional Decentralization and the Soft Budget Constraint: The Case of China," CEPR Discussion Papers 1013, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1013
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    Citations

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    Cited by:

    1. Martin Raiser, 1998. "Subsidising inequality: Economic reforms, fiscal transfers and convergence across Chinese provinces," Journal of Development Studies, Taylor & Francis Journals, vol. 34(3), pages 1-26.
    2. Vahabi, Mehrdad, 2003. "La contrainte budgétaire lâche et la théorie économique
      [Soft Budget Constraint and Economic Theory]
      ," MPRA Paper 17651, University Library of Munich, Germany.
    3. Svensson, Jakob, 2000. "When is foreign aid policy credible? Aid dependence and conditionality," Journal of Development Economics, Elsevier, vol. 61(1), pages 61-84, February.
    4. Wang, Yijiang & Chang, Chun, 1998. "Economic transition under a semifederalist government: The experience of China," China Economic Review, Elsevier, vol. 9(1), pages 1-23.
    5. Raiser, Martin, 1997. "How are China's state-owned enterprises doing in the 1990s? Evidence from three interior provinces," China Economic Review, Elsevier, vol. 8(2), pages 191-216.
    6. Martimort, David, 1996. "The multiprincipal nature of government," European Economic Review, Elsevier, vol. 40(3-5), pages 673-685, April.
    7. Berglof, Erik & Roland, Gerard, 1998. "Soft Budget Constraints and Banking in Transition Economies," Journal of Comparative Economics, Elsevier, vol. 26(1), pages 18-40, March.
    8. Estache, Antonio & Martimort, David, 1999. "Politics, transaction costs, and the design of regulatory institutions," Policy Research Working Paper Series 2073, The World Bank.
    9. Torsten Persson & Gerard Roland & Guido Tabellini, "undated". "The Theory of Fiscal Federalism: What Does it Mean for Europe?," Working Papers 101, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    10. Mehrdad VAHABI, 2001. "The Soft Budget Constraint : A Theoretical Clarification," Discussion Papers (REL - Recherches Economiques de Louvain) 2001024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    11. Berglof, Erik & Roland, Gerard, 1997. "Soft budget constraints and credit crunches in financial transition," European Economic Review, Elsevier, vol. 41(3-5), pages 807-817, April.
    12. Yingyi, Qian & Roland, Gerard, 1996. "The soft budget constraint in China," Japan and the World Economy, Elsevier, vol. 8(2), pages 207-223, June.
    13. Mathias Dewatripont & Gérard Roland, 1996. "Transition as a process of large-scale institutional change," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 4(1), pages 1-30, May.

    More about this item

    Keywords

    China; Decentralization; Economic Transition; Federalism; Soft Budget Constraint;

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • L30 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - General
    • P3 - Economic Systems - - Socialist Institutions and Their Transitions
    • P5 - Economic Systems - - Comparative Economic Systems

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