Inside Job, Chinese Style: Suspicious Use of Public Funds under Fiscal Pressure

Governments usually increase taxes or cut spending to tackle deficits. In contrast, local governments in China tend to increase suspicious uses of public funds under fiscal pressure, which is not well understood. Using the reduction of agricultural tax as a revenue shock, we find that greater fiscal pressure leads to higher questionable fund use by county governments. The suspicious activities are triggered by the motivation to reallocate resources, to fields that correlate with officials' own interests like stimulating local economic growth, pursuing personal promotion as well as grabbing resources before retirement.