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Provincial and Local Governments in China: Fiscal Institutions and Government Behavior

  • Roger H. Gordon
  • Wei Li

What are the incentives faced by local officials in China? Without democratic institutions, there is no mechanism for local residents to exercise "voice". Given the hukou registration system, local residents have little opportunity to threaten "exit" if they are unhappy with local taxes and spending. This paper explores an alternative source of incentives, starting from the premise that local officials aim to maximize the jurisdiction's fiscal residual (profits), equal to local tax revenue minus expenditures on public services. In a Tiebout setting with mobile households, this objective should lead to efficient provision. What happens, though, if firms and economic activity but not people are mobile? The paper examines the incentives faced by local Chinese officials in this context, and argues that the forecasted behavior helps to explain both the successes and the problems arising from local government activity in China.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16694.

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Date of creation: Jan 2011
Date of revision:
Publication status: published as Provincial and Local Governments in China: Fiscal Institutions and Government Behavior , Roger H. Gordon, Wei Li. in Capitalizing China , Fan and Morck. 2013
Handle: RePEc:nbr:nberwo:16694
Note: PE
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