The impact of local government debt on entrepreneurship: Evidence from a quasi-natural experiment of local debt governance reform

Jiacai Xiong, Ling Huang, Zelin Yang and Xin Wang

International Review of Economics & Finance, 2024, vol. 93, issue PA, 501-519

Abstract: We investigate the impact of China's New Budget Law of 2015 on local entrepreneurship. The legislation introduces exogenous limitations on local governments' debt-financing mechanisms. Our findings suggest that rates of new business registration experience an uptick following this change in debt management, which implies the reform can bolster local entrepreneurial ventures. This effect is more pronounced for firms operating in cities characterized by poor financial infrastructure, elevated fiscal stress, limited market openness, or inadequate legal frameworks. Supplementary analysis reveals that enhanced access to broader financing options, alleviated local tax and non-tax obligations, optimized urban land use, and reduced firms' perceptions of economic uncertainty serve as four mechanisms underlying our findings. Collectively, this governance modification mitigates the crowding-out effect exerted by local government debt on private-sector activity, leading to an increase in local entrepreneurship.

Keywords: Local government debt; Entrepreneurship; The new budget law; Crowding out effect (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:93:y:2024:i:pa:p:501-519

DOI: 10.1016/j.iref.2024.03.014

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