Revenue pressure of local governments and firm productivity: Evidence from a natural experiment in China

Ling Zhu and Dongmin Kong

Economics of Transition and Institutional Change, 2023, vol. 31, issue 3, 721-748

Abstract: This study investigates how the revenue pressure of local governments affects firm total factor productivity (TFP). To establish causality, we exploit a policy shock in China, that is, the cancellation of agricultural tax in 2005. Specifically, we document that governments suffering from sudden tax reduction substantially increase local firms' productivity in the subsequent periods. Furthermore, we use the difference‐in‐differences‐in‐differences approach to explore the potential channels through which the local fiscal squeeze improves firm productivity. Local firms increase capital and employment and adopt a higher capital‐to‐labour substitution for a higher TFP in response to the local governments' fiscal squeeze. We find that the effects of revenue pressure incentives on productivity are prominent in firms with low resource misallocation and high labour quality. Our finding suggests that local governments could improve firm productivity in response to fiscal revenue pressure by enhancing resource allocation efficiency and labour quality.

Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://doi.org/10.1111/ecot.12352

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wly:ectrin:v:31:y:2023:i:3:p:721-748

Access Statistics for this article

More articles in Economics of Transition and Institutional Change from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().