Financial openness, trade openness, and the size of local government: evidence from China

Chi Yao and Yong Ma ()
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Chi Yao: School of Finance, Shanghai University of International Business and Economics
Yong Ma: China Financial Policy Research Center, School of Finance, Renmin University of China

Economia Politica: Journal of Analytical and Institutional Economics, 2025, vol. 42, issue 3, No 1, 625-648

Abstract: Abstract This paper examines the effects of financial and trade openness on the size of local government at the provincial level using panel data from the China. We find robust evidence that, although financial openness has a negative impact on local government size, the impact of trade openness is nonlinear and U shaped. Further analyses show various volatility channels (financial volatility, trade volatility, economic volatility, inflation volatility, and employment volatility) through which the impact of openness on local government size works. Moreover, the results of the interaction effect indicate that the negative impact of financial openness on local government size tends to be attenuated by a higher level of trade openness. In addition, we also find that the negative impact of openness on government size is more evident in regions with low levels of wealth and population. The results of this paper provide new evidence and offer interesting insights into the long-standing debate over the effects of openness on government size.

Keywords: Financial openness; Government size; Trade openness (search for similar items in EconPapers)
JEL-codes: F10 F36 H10 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s40888-025-00374-1

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