NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Provincial and Local Governments in China: Fiscal Institutions and Government Behavior

Roger H. Gordon, Wei Li

NBER Working Paper No. 16694
Issued in January 2011
NBER Program(s):   PE

What are the incentives faced by local officials in China? Without democratic institutions, there is no mechanism for local residents to exercise "voice". Given the hukou registration system, local residents have little opportunity to threaten "exit" if they are unhappy with local taxes and spending. This paper explores an alternative source of incentives, starting from the premise that local officials aim to maximize the jurisdiction's fiscal residual (profits), equal to local tax revenue minus expenditures on public services. In a Tiebout setting with mobile households, this objective should lead to efficient provision. What happens, though, if firms and economic activity but not people are mobile? The paper examines the incentives faced by local Chinese officials in this context, and argues that the forecasted behavior helps to explain both the successes and the problems arising from local government activity in China.

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Document Object Identifier (DOI): 10.3386/w16694

Published: Provincial and Local Governments in China: Fiscal Institutions and Government Behavior, Roger H. Gordon, Wei Li. in Capitalizing China, Fan and Morck. 2013

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