Administrative Resources, New Investment, and Local Taxation

Abstract

While administrative resources are thought to generate positive impacts on local economic conditions, most existing investigations of this relationship suffer from endogeneity concerns. Exploiting China’s Relocation Reform policies, we estimate the causal impacts of construction of new administrative centers in Chinese prefectures that is plausibly exogenous from local economic conditions. We find the opening of new administrative centers leads to a 15% increase in total local tax revenues, and larger gains in VAT, CIT, and personal income taxes. Channels of the effect are shown to be gains in regional employment, higher wages, and increased foreign direct investment (FDI).

Keywords: Local Tax Revenue, Economic Development, Administrative Center Relocations