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

Roger Gordon and Wei Li

No 16694, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H7 O17 O38 O53 P16 P2 P43 (search for similar items in EconPapers)
Date: 2011-01
New Economics Papers: this item is included in nep-pbe, nep-tra and nep-ure
Note: PE
References: View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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

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Chapter: Provincial and Local Governments in China: Fiscal Institutions and Government Behavior (2012)
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