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Investment Promotion, Fiscal Competition and Economic Growth Sustainability

Bin Wu (), Xuefei Xu () and Zhenzhong Feng ()
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Bin Wu: School of Economics and Management, Southeast University, Nanjing 210096, China
Xuefei Xu: School of Economics and Management, Southeast University, Nanjing 210096, China
Zhenzhong Feng: School of Economics and Management, Southeast University, Nanjing 210096, China

Sustainability, 2018, vol. 10, issue 1, 1-12

Abstract: Local governments in China build development zones to attract investment. We develop a model of fiscal competition to examine investment promotion under centralization and decentralization. Our study shows that even when perfect information is not available, under the condition of an indivisible investment, a central government achieves the optimal investment in development zones and the best tax ratio for maximizing total welfare, whereas decentralized decision-making easily results in infrastructure overinvestment and tax erosion, which does harm to economic growth sustainability.

Keywords: fiscal competition; investment promotion; economic growth sustainability (search for similar items in EconPapers)
JEL-codes: Q Q0 Q2 Q3 Q5 Q56 O13 (search for similar items in EconPapers)
Date: 2018
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