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

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  • Roger H. Gordon
  • Wei Li

Abstract

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.

Suggested Citation

  • Roger H. Gordon & Wei Li, 2011. "Provincial and Local Governments in China: Fiscal Institutions and Government Behavior," NBER Working Papers 16694, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:16694
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    Cited by:

    1. Liu, Yongzheng & Alm, James, 2016. "“Province-Managing-County” fiscal reform, land expansion, and urban growth in China," Journal of Housing Economics, Elsevier, vol. 33(C), pages 82-100.
    2. Anping Chen & Marlon Boarnet & Mark Partridge & Yongzheng Liu & Jorge Martinez-Vazquez, 2014. "Interjurisdictional Tax Competition In China," Journal of Regional Science, Wiley Blackwell, vol. 54(4), pages 606-628, September.
    3. Han, Li & Kung, James Kai-Sing, 2015. "Fiscal incentives and policy choices of local governments: Evidence from China," Journal of Development Economics, Elsevier, vol. 116(C), pages 89-104.
    4. Yuan, Cheng & Zhang, Lei, 2015. "Public education spending and private substitution in urban China," Journal of Development Economics, Elsevier, vol. 115(C), pages 124-139.
    5. Boya Wang, 2016. "Ownership, Institutions & Firm Value: Cross-Provincial Evidence from China," Working Papers wp484, Centre for Business Research, University of Cambridge.
    6. Cull, Robert & Li, Wei & Sun, Bo & Xu, Lixin Colin, 2015. "Government connections and financial constraints: Evidence from a large representative sample of Chinese firms," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 271-294.
    7. repec:eee:riibaf:v:44:y:2018:i:c:p:547-565 is not listed on IDEAS
    8. repec:gam:jsusta:v:10:y:2018:i:1:p:45-:d:125112 is not listed on IDEAS
    9. repec:eee:jbfina:v:87:y:2018:i:c:p:135-149 is not listed on IDEAS
    10. Chang, Zheng, 2014. "Financing new metros—The Beijing metro financing sustainability study," Transport Policy, Elsevier, vol. 32(C), pages 148-155.
    11. Firth, Michael & Gong, Stephen X. & Shan, Liwei, 2013. "Cost of government and firm value," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 136-152.
    12. Peng, Yuchao & Yan, Lili, 2015. "Political Connections, Discriminatory Credit Constraint and Business Cycle," MPRA Paper 61439, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
    • P2 - Economic Systems - - Socialist Systems and Transition Economies
    • P43 - Economic Systems - - Other Economic Systems - - - Finance; Public Finance

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