Vertical fiscal imbalance and local fiscal indiscipline: Empirical evidence from China

Junxue Jia, Yongzheng Liu, Jorge Martinez-Vazquez () and Kewei Zhang

European Journal of Political Economy, 2021, vol. 68, issue C

Abstract: Based on 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 effort. 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 the VFI and provide significant implications for improving the design of fiscal decentralization policy in China and elsewhere.

Keywords: Vertical fiscal imbalance; Local fiscal indiscipline; Partial fiscal decentralization; China (search for similar items in EconPapers)
JEL-codes: H20 H71 H77 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Vertical Fiscal Imbalance and Local Fiscal Indiscipline: Empirical Evidence from China (2020)
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:eee:poleco:v:68:y:2021:i:c:s0176268020301403

DOI: 10.1016/j.ejpoleco.2020.101992

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