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Fiscal decentralization and China’s provincial economic growth: a panel data analysis for China’s tax sharing system

Author

Listed:
  • Zao Sun

    (Xi’an Jiaotong University)

  • Chun-Ping Chang

    (Shih Chien University at Kaohsiung
    National Sun Yat-Sen University)

  • Yu Hao

    (Beijing Institute of Technology
    Beijing Institute of Technology
    Beijing Institute of Technology)

Abstract

Theoretical studies suggest that there is a close association between fiscal decentralization and economic growth. However, whether this linkage holds in China or not is a matter of ongoing debate in recent empirical studies. In this paper, we investigate the impact of the 1994 tax sharing system on economic growth in China. Using a panel dataset for 29 provinces in China over the 1995–2014 period in a simultaneous equations system that controls for the simultaneity of fiscal decentralization, physical capital accumulation and economic growth, the influence of decentralization on economic growth is estimated. The estimation results indicate that there is an inverted-U shaped relationship between fiscal decentralization and economic growth. Because the optimal level of fiscal decentralization that maximizes economic growth is higher than the data for most provinces, further decentralization is in general helpful to China’s economic growth.

Suggested Citation

  • Zao Sun & Chun-Ping Chang & Yu Hao, 2017. "Fiscal decentralization and China’s provincial economic growth: a panel data analysis for China’s tax sharing system," Quality & Quantity: International Journal of Methodology, Springer, vol. 51(5), pages 2267-2289, September.
    • Handle: RePEc:spr:qualqt:v:51:y:2017:i:5:d:10.1007_s11135-016-0386-2
    DOI: 10.1007/s11135-016-0386-2
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