Local fiscal competition and deficits in China

This paper adds to the literature by examining fiscal competition and deficit financing by local governments in a developing country, China. We examine tax competition using a unique revenue source in China, land-use premiums, in a panel dataset consolidated at the prefectural level from 2006 to 2016. Our results indicate that fiscal competition in land-use premiums exists and is stronger for wealthier than poorer prefectures, a result that supports the view of Cai and Treisman (Am Econ Rev 95:817–830, 2005. https://doi.org/10.1257/0002828054201314 ) that competition among asymmetrically endowed regions can lead to less discipline. Moreover, we find higher lagged deficits for prefectures lead to lower land-use premiums, a result that suggests that the prefecture does not fill any fiscal gap with own revenues, is consistent with soft budget constraint arguments, and suggests that competitive pressures do not eliminate this problem.