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Frontiers of Economics in China

ISSN 1673-3444

ISSN 1673-3568(Online)

CN 11-5744/F

Postal Subscription Code 80-978

Front. Econ. China    2018, Vol. 13 Issue (2) : 223-248    https://doi.org/10.3868/s060-007-018-0014-1
Orginal Article |
Asymmetric Decentralization, Intergovernmental Transfers, and Expenditure Policies of Local Governments
Yongyou Li()
School of Finance and Taxation, Zhejiang University of Finance and Economics, Hangzhou 310018, China
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Abstract

Although China’s asymmetric fiscal decentralization system has been criticized for many years, there have been few studies giving direct evidence of its negative incentives on local government spending policies. By introducing the mechanism of asymmetric decentralization and fiscal transfers to the objective function of local government, this paper studies the incentive effects of asymmetric decentralization and fiscal transfers on spending policies of local governments, and uses the provincial panel data to carry out an empirical test. The conclusion shows that the asymmetric decentralization significantly weakens the incentives of local government to increase social expenditure, and as a solution to asymmetric decentralization, fiscal transfers fail to play a good role. Due to the relatively large income effect, the financing mechanism of fiscal transfers not only significantly reduces the incentives of local government to provide social public goods, but also weakens the constraint effect of fiscal competition on expenditure policies of local governments because of the increase in the relative cost. Although the distribution mechanism of fiscal transfers has a significant positive incentive to local government in regions where the net inflow of fiscal resources is more than zero, because of common pooling effects, the comprehensive effects of fiscal transfers in the distribution of incentives of local governments to provide social public goods are negative in all regions.

Keywords asymmetric decentralization      intergovernmental transfers      incentive mechanism      expenditure policies     
Issue Date: 02 May 2018
 Cite this article:   
Yongyou Li. Asymmetric Decentralization, Intergovernmental Transfers, and Expenditure Policies of Local Governments[J]. Front. Econ. China, 2018, 13(2): 223-248.
 URL:  
http://academic.hep.com.cn/fec/EN/10.3868/s060-007-018-0014-1
http://academic.hep.com.cn/fec/EN/Y2018/V13/I2/223
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