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Transfers-based Decentralization, Local Endowment and Public Employment: A theoretical inquiry and empirical evidence from China

  • Fei Yuan

    (Chinese Academy of Social Sciences)

  • Ran Tao

    (Chinese Academy of Social Sciences)

  • Zhigang Xu

    (Chinese Academy of Social Sciences)

  • Mingxing Liu

    (Peking University)

  • Heng-fu Zou

    (Central University of Finance and Economics
    Wuhan University
    the World Bank)

  • Chunli Shen

    (University of Maryland)

Based on the theoretical literature of fiscal decentralization, we discuss the political economy of inter-governmental fiscal arrangements in China and examine how a transfer-based decentralization impacts on local public employment. A theoretical model is built to show that compared to their counterparts in better-endowed localities, local governments in worse-endowed localities that are more heavily dependent on upper level fiscal transfers to finance their spending have higher incentives to increase public employment to build local political support rather than invest in growth-promoting public goods. Using a county-level panel data set from 1994 to 2003, we empirically identify the causality from higher transfer dependency to the expansion of public employment with an instrumental variable approach. It is argued that under a governance regime in which local governments are more accountable to the upper level than to local constituency, transfer-based decentralization, either through general-purpose transfer or through earmarked transfer, would both lead to serious problems. The policy implication is that expenditure decentralization needs to be accompanied by both revenue and political decentralization to achieve better local governance outcomes.

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Paper provided by China Economics and Management Academy, Central University of Finance and Economics in its series CEMA Working Papers with number 333.

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Length: 48 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:cuf:wpaper:333
Contact details of provider: Web page: http://cema.cufe.edu.cn/

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  1. Philip J. Grossman, 1989. "Fiscal Decentralization and Government Size: An Extension," Monash Economics Working Papers archive-05, Monash University, Department of Economics.
  2. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
  3. Jin, Hehui & Qian, Yingyi & Weingast, Barry R., 2005. "Regional decentralization and fiscal incentives: Federalism, Chinese style," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1719-1742, September.
  4. Keen, Michael & Marchand, Maurice, 1997. "Fiscal competition and the pattern of public spending," Journal of Public Economics, Elsevier, vol. 66(1), pages 33-53, October.
  5. Tsui, Kai-yuen, 2005. "Local tax system, intergovernmental transfers and China's local fiscal disparities," Journal of Comparative Economics, Elsevier, vol. 33(1), pages 173-196, March.
  6. Albert Alesina & Stephan Danninger & Massimo Rostagno, 2001. "Redistribution Through Public Employment: The Case of Italy," IMF Staff Papers, Palgrave Macmillan, vol. 48(3), pages 2.
  7. Fisman, Raymond & Gatti, Roberta, 2000. "Decentralization and corruption - evidence across countries," Policy Research Working Paper Series 2290, The World Bank.
  8. Zhihua Zhang & Jorge Martinez-Vazquez, 2003. "The System of Equalization Transfers in China," International Center for Public Policy Working Paper Series, at AYSPS, GSU paper0312, International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University.
  9. Li, Hongbin & Zhou, Li-An, 2005. "Political turnover and economic performance: the incentive role of personnel control in China," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1743-1762, September.
  10. Park, Albert & Wang, Sangui & Wu, Guobao, 2002. "Regional poverty targeting in China," Journal of Public Economics, Elsevier, vol. 86(1), pages 123-153, October.
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