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

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  • Roger H. Gordon
  • Wei Li

Abstract

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.

Suggested Citation

  • Roger H. Gordon & Wei Li, 2011. "Provincial and Local Governments in China: Fiscal Institutions and Government Behavior," NBER Working Papers 16694, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16694
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    JEL classification:

    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • O17 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Formal and Informal Sectors; Shadow Economy; Institutional Arrangements
    • O38 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Government Policy
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • P2 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies
    • P43 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Finance; Public Finance

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