Fiscal Competition And The Structural Distortions Of Fiscal Expenditures Under The System Of Decentralization In China

This dissertation studies the following question:under fiscal decentralization, what is relationship among fiscal competition and the Composition of fiscal expenditures? We first analyze qualitatively the scale and composition of local government expenditures, and then study the three stages of local fiscal competition under fiscal decentralization. Most importantly, we establish theoretical model which study the economic behavior of local officials and structural distortions of local fiscal expenditures, and econometric models attempt to verify it. The main conclusions are as follows:Firstly, by analyzing the scale and composition of local government expenditures, we found that:expenditure responsibilities are highly endowed with local government. Along with the continuing decentralization of powers, the scale of local fiscal expenditures is enlarged. At the same time, the composition of local fiscal expenditures is distortion.Secondly, Local competition in China has experienced three stages:the "brothers of competition" under the traditional planning system; local fiscal competition under fiscal contracts system; local fiscal competition under revenue-sharing system. The author finds four characteristics. Fiscal competition among local governments has improved the efficiency in providing public goods as well as negative effects. In particular, fiscal competition among local governments has led to the structural distortions of local fiscal expenditures.Finally, within fiscal competition and the promotion of competition, this dissertation establishs theoretical model which study the economic behavior of local officials and structural distortions of local fiscal expenditures. The model demonstrates that many factors will affect the spending behavior of local officials, for example, economic growth, the supply of public goods, the term of local officials as well as the tax rate.The more stressed the GDP by central governments and the shorter term of local officials, the greater incentives the local officials have to invest in infrastructure in order to win in the promotion of competition. Coupled with additional investment incentives brought capital flows, local officials are willing to put the greater the investment in infrastructure on the term of office, which further reduces the space and proportion of public goods and personal consumption.In addition, this dissertation positive research the effect of local fiscal competition on the public expenditures composition, by the change of proportion of public health expenditures from 1997 to 2004. The study find that faced fiscal and promotion incentives, the local governments engaged in fierce fiscal competition. Due to limited fiscal resources, the local governments put more resources into the infrastructure, while crowding out the public health expenditures. At the same time, as a result of economic structural differences between them, the developed and less developed have different position in the fiscal competition. For the less developed regions is concerned, due to the huge fiscal gap they are always at a disadvantage. Therefore, they more ignore the demand for public services, which led to lack of public health expenditures.Therefore, to change structural distortions of local public expenditures, it is important to reconstruction the relationship between the central and local government. The methods should be taken as follows:to establish a standardized system of financial expenditure, clearly the responsibility of local government; to reform the check system to achieve transformation of local governance; to regulate the transfer payment system, and improve the ability of local government expenditures; to deepen system reforms, and make the revealed preference mechanism by "foot voting" full work.