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Investment Promotion, Fiscal Competition and Economic Growth Sustainability

Author

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  • Bin Wu

    (School of Economics and Management, Southeast University, Nanjing 210096, China)

  • Xuefei Xu

    (School of Economics and Management, Southeast University, Nanjing 210096, China)

  • Zhenzhong Feng

    (School of Economics and Management, Southeast University, Nanjing 210096, China)

Abstract

Local governments in China build development zones to attract investment. We develop a model of fiscal competition to examine investment promotion under centralization and decentralization. Our study shows that even when perfect information is not available, under the condition of an indivisible investment, a central government achieves the optimal investment in development zones and the best tax ratio for maximizing total welfare, whereas decentralized decision-making easily results in infrastructure overinvestment and tax erosion, which does harm to economic growth sustainability.

Suggested Citation

  • Bin Wu & Xuefei Xu & Zhenzhong Feng, 2018. "Investment Promotion, Fiscal Competition and Economic Growth Sustainability," Sustainability, MDPI, vol. 10(1), pages 1-12, January.
    • Handle: RePEc:gam:jsusta:v:10:y:2018:i:1:p:45-:d:125112
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    References listed on IDEAS

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