Does Fiscal Decentralization Increase the Investment Rate? Evidence from Chinese Panel Data

Qichun He and Meng Sun ()
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Meng Sun: Business School, Beijing Normal University

Annals of Economics and Finance, 2018, vol. 19, issue 1, 75-101

Abstract: China has one of the highest investment rates in the world, and in 1994, China introduced a new fiscal system. The current study utilizes provincial panel data from the period of 1995-2010 to provide a consistent underlying fiscal regime. The estimation results show that expenditure decentralization has a significant, positive effect on the physical capital investment rate in both least squares dummy variables (LSDV) and system GMM (Generalized method of moments) estimations. In contrast, revenue decentralization has a negative effect on the investment rate. One possible explanation is that China's political centralization has been maintained during its economic decentralization. Since the provincial officials are not elected by local constituents but are rather appointed by the central government, it is rational for provincial officials to raise investment rates to meet the cadre promotion criteria of the central government, be it growth performance, as argued by Blanchard and Shleifer (2001) or revenue collection, identified by Shih et al. (2012).

Keywords: fiscal decentralization; investment rate; panel data (search for similar items in EconPapers)
JEL-codes: C23 H77 O16 (search for similar items in EconPapers)
Date: 2018
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