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Fiscal Incentives and Policy Choices of Local Governments, Evidence from China

Author

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  • Li Han

    (Division of Social Science, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

  • James Kung

    (Division of Social Science, Hong Kong University of Science and Technology
    Institute for Emerging Market Studies, Hong Kong University of Science and Technology)

Abstract

This paper examines how fiscal incentives affect the policy choices of local governments in the context of China. Based on exogenous changes in the intergovernmental revenue sharing scheme, we construct a simulated instrumental variable to resolve the endogeneity problem. We find evidence that local governments shifted their efforts from fostering industrial growth to "urbanizing" China, i.e., to developing the real estate and construction sectors, when their retention rate of enterprise tax revenue was reduced. The increase from the new revenue source compensated for half of the losses in revenue that resulted from the reassignment of fiscal rights. The reassignment had also the effect of retarding the industrial growth of domestically-owned firms in particular.

Suggested Citation

  • Li Han & James Kung, 2015. "Fiscal Incentives and Policy Choices of Local Governments, Evidence from China," HKUST IEMS Working Paper Series 2015-13, HKUST Institute for Emerging Market Studies, revised Mar 2015.
    • Handle: RePEc:hku:wpaper:201513
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    References listed on IDEAS

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    More about this item

    Keywords

    fiscal federalism; fiscal incentives; revenue sharing; local governments; land conveyance; urbanization; simulated instrumental variable;
    All these keywords.

    JEL classification:

    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General
    • H39 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Other

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