Vertical Fiscal Imbalance and Local Fiscal Indiscipline: Empirical Evidence from China

Junxue Jia, Yongzheng Liu, Jorge Martinez-Vazquez (jorgemartinez@gsu.edu) and Kewei Zhang
Additional contact information
Junxue Jia: Renmin University of China
Kewei Zhang: Boston University, USA

International Center for Public Policy Working Paper Series, at AYSPS, GSU from International Center for Public Policy, Andrew Young School of Policy Studies, Georgia State University

Abstract: Based on a Chinese city-level panel dataset, this paper examines the effects of vertical fiscal imbalances (VFI) on local fiscal indiscipline in a partial fiscal decentralization setting. We find that higher VFI induces a form of fiscal indiscipline: a reduction of tax collection effort by local governments. In addition, by exploiting the unique Chinese fiscal institution of “extra-budgetary” revenues, we show that in this case higher VFI does not alter local governments’ tax collection efforts. Even though local governments also possess full taxing power for “extra-budgetary” revenues, these revenues do not contribute to the determination of central fiscal transfers to local governments, thus creating very different incentives for local governments’ response to VFI. Our results shed light on the working mechanism of VFI and provide significant implications for improving the design of fiscal decentralization policy in China and elsewhere.

Pages: 75 pages
Date: 2020-04
New Economics Papers: this item is included in nep-cna, nep-mac, nep-tra and nep-ure
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Citations: View citations in EconPapers (8)

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https://icepp.gsu.edu/files/2020/04/paper2006.pdf (application/pdf)

Related works:
Journal Article: Vertical fiscal imbalance and local fiscal indiscipline: Empirical evidence from China (2021)
Working Paper: Vertical Fiscal Imbalance and Local Fiscal Discipline: Empirical Evidence from China (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ays:ispwps:paper2006

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