Intergovernmental transfer under heterogeneous accountabilities: The effects of the 2006 Chinese Education Finance Reform

While intergovernmental transfers are widely used in improving local education, how local governments in non-democracies allocate fiscal transfers, given they are not electorally accountable, remains unclear. We study the impacts of the 2006 Chinese Education Finance Reform, one of the world’s largest education transfer grants, on public school spending. By comparing 1600 Chinese counties that were treated differently in timing and matching ratios, we show natural experimental evidence on how heterogeneous top-down and bottom-up accountabilities affect the allocation of transfer grants. On average, intergovernmental transfers did not increase the total spending levels of local public schools. The causal mechanism is that the transfers crowded out preexisting local public education investments in extra-budgetary accounts that were not scrutinized and audited by upper-level governments. Heterogeneity analyses further demonstrate that the policy only improved public school spending in counties where public employees had greater means of holding local governments accountable.