Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style

Posted: 24 Jan 2006

See all articles by Hehui Jin

Hehui Jin

Stanford University

Yingyi Qian

Tsinghua University - School of Economics & Management; Centre for Economic Policy Research (CEPR)

Barry R. Weingast

Stanford University, Department of Political Science

Abstract

Aligning the interests of local governments with market development is an important issue for developing and transition economies. Using a panel data set from China, we investigate the relationship between provincial government's fiscal incentives and provincial market development. We report three empirical findings. First, we find that during the period of "fiscal contracting system" the discrepancy between ex ante contracts and ex post implementation was relatively small, suggesting that the fiscal contracts were credible. Second, we find a much higher correlation, about four times, between the provincial government's budgetary revenue and its expenditure during 1980s and 1990s as compared to 1970s, demonstrating that provincial governments faced much stronger ex post fiscal incentives after reform. Third, we find that stronger ex ante fiscal incentives, measured by the contractual marginal retention rate of the provincial government in its budgetary revenue, are associated with faster development of the non-state sector as well as more reforms in the state sector in the provincial economy. This holds even when we control for the conventional measure of fiscal decentralization. Finally, we compare federalism, Chinese style, to federalism, Russian style.

Keywords: Federalism, local government, fiscal incentives, economic development, transition

JEL Classification: P35, P51, H77

Suggested Citation

Jin, Hehui and Qian, Yingyi and Weingast, Barry R., Regional Decentralization and Fiscal Incentives: Federalism, Chinese Style. Journal of Public Economics, Vol. 89, No. 9-10, pp. 1719-1742, September 2005. Available at SSRN: https://ssrn.com/abstract=877045

Hehui Jin (Contact Author)

Stanford University ( email )

Stanford, CA 94305
United States

Yingyi Qian

Tsinghua University - School of Economics & Management

Beijing, 100084
China

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Barry R. Weingast

Stanford University, Department of Political Science ( email )

Stanford, CA 94305-6010
United States
650-723-0497 (Phone)
650-723-1808 (Fax)

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