Fiscal Incentives and Policy Choices of Local Governments, Evidence from China

Li Han () and James Kung ()
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Li Han: Division of Social Science, Hong Kong University of Science and Technology

No 2015-13, HKUST IEMS Working Paper Series from HKUST Institute for Emerging Market Studies

Abstract: This paper examines how fiscal incentives affect the policy choices of local governments in the context of China. Based on exogenous changes in the intergovernmental revenue sharing scheme, we construct a simulated instrumental variable to resolve the endogeneity problem. We find evidence that local governments shifted their efforts from fostering industrial growth to "urbanizing" China, i.e., to developing the real estate and construction sectors, when their retention rate of enterprise tax revenue was reduced. The increase from the new revenue source compensated for half of the losses in revenue that resulted from the reassignment of fiscal rights. The reassignment had also the effect of retarding the industrial growth of domestically-owned firms in particular.

Keywords: fiscal federalism; fiscal incentives; revenue sharing; local governments; land conveyance; urbanization; simulated instrumental variable (search for similar items in EconPapers)
JEL-codes: H39 H70 H77 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2015-03, Revised 2015-03
New Economics Papers: this item is included in nep-cna
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (99)

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http://iems.ust.hk/assets/publications/working-papers-2015/iemswp2015-13.pdf First version, 2015 (application/pdf)

Related works:
Journal Article: Fiscal incentives and policy choices of local governments: Evidence from China (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:hku:wpaper:201513

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