A Theoretical Study Of The Provision Of Local Public Goods

The theory of public goods has been increasingly emphasized during the transitionfrom traditional finance towards public economics. With the transformation ofgovernment functions, the governments retreat gradually from generally competitiveareas and focus on the provision of public goods and services. Actually, most of thosepublic goods and services are provided by local governments due to the decentralizationreform which could be characterized by the assignment of fiscal power and acting dutyto lower tier governments. Under such a background it is very urgent and imperative tostudy the issues concerning the provision of local public goods. Traditional theory of public goods elaborates primarily on the Pareto condition ofthe efficient provision of public goods, which is known as the Samuelson's Rule and itsextensive forms. As for the local public goods, it is not enough to analyze the problemjust from a perspective of normal research because of its local scope, diversity of localgovernments and the mobility of factors among regions. Modern theory developmentshave shown that most researches concentrate on the question whether the local publicgoods will be underprovided under some certain hypotheses. As a theoreticalcontribution and also as one of the innovations, this thesis is intended to synthesizecurrent studies into a neoclassical general-equilibrium model with mobility and taxcompetition being taken into account. The thesis not only gives a theoretical explanationto the underprovision of local public goods, but also proves that complete mobility ofhouseholds is vital to the solution to such a problem. After an investigation of current situationabout the provision of local public goodsin China, it is found there exists a selective distortion in local governments'behavior inthis aspect. That's to say, some local public goods are oversupplied while others areundersupplied. However, it is hard to explain such a phenomenon following the aboveneoclassical general-equilibrium model. As the main innovation, in this thesis weclassify the local public goods into two kinds—the distinct kind and the indistinct kind,and abandon the unpractical hypothesis of "benevolent government". In brief, thedistinct local public goods refer to developing zones, city plazas, high buildings and IIIlarge mansions, etc., which are the embodiment of government's achievements. Theindistinct local public goods mainly are education, medical care, and so on, whoseeffects are hard to observe and evaluate. It is obvious to see that the information transfercost for the former kind is much lower than the latter kind. After a re-examination of theobjectives and restriction mechanism of local government officials, the thesis proposesthat it is the central - government - oriented objective function and physical –achievements - oriented assessing and checking mechanism that leads to the selectivedistortion. An obvious logical question coming next is why the selective distortion is anation-wide phenomenon since the provision of distinct local public goods is costly andall local governments have not the same fiscal capabilities. The local finance is likely togo bankrupt for a relatively poor region if it tries to cater for central government'spreferences in the competition with other rich regions by providing distinct local publicgoods. As another innovation, the thesis introduces into the concept ofsoft-cost-constraint and points out that the benefit losses suffered from selectivedistortion have been shifted by local government officials to local people. In fact, localgovernment officials bear no responsibilities for their deeds in the provision of localpublic goods. Following this thought, it is easy to understand the common case in Chinathat the poorer the region is the more distinct local public goods ("zhengjigongcheng"inChinese) are supplied. Additionally, a signaling model in informati...