Central To The Separation Of Research And Relative Performance Evaluation Of Regional Competition

Since reform and opening, China has experienced a rapid economic growth for more than thirty years. In this process, decentralization between central and local governments together with ensuing interregional competition has played a crucial roleIn the era of planned economy, local governments had no enough decision-making autonomy, and hence could not make and implement specific localized economic policies. Meanwhile, under the highly centralized fiscal regime, they were not responsible for either input or output. As a result, they also lacked incentive to develop local economies.At the beginning of reform, the central government delegated some decision-making power to local government through subcontracting system. Typically, local governments turned over a fixed lump-sum tax or profit to the central government and then kept the residuals. From the viewpoint of incentive theory, the central government was offering a high-powered incentive contract by this subcontracting arrangement. Although this reform greatly increased the incentives for the local governments, it also brought forth a lot of new problems. One important problem is that, as the central government only got a fixed payment, it could not share the fruit of rapid economic growth. Therefore, the proportion of central fiscal revenue to overall fiscal revenue declined gradually, which seriously deceased central government’s capacity to intervene national economy.The fiscal reform initiated in1994, in essence, constructed a profit-sharing contract between the central government and local governments, in lieu of which they could take risks and share benefits together. However, compared to former subcontracting arrangement, profit-sharing contract will lower incentive power. To solve this problem, the central government also introduced and strengthened GDP oriented yardstick competition or relative performance evaluation among local governments. Naturally, GDP-oriented yardstick competition is not a perfect incentive system. It created not only "good" incentives but also "bad" incentives from the local governments. On the one hand, local governments assiduously improved infrastructure, and attracted foreign investment to increase their own GDP performances. In some sense, these kinds of "good" incentives are the main driving forces for Chinese economic growth. On the other hand, in order to lower competitors’GDP performances, local governments also have strong incentives to take some beggar-thy-neighbor strategies. The prolonged phenomena of regional duplicative investments and vicious competitions are its typical representations.The central government often has more diversified aims than local ones. However, under GDP tournament, local governments (officials) paid excessive attention to those observable indices related to GDP but omitted those unobservable indices related to public welfare. This explains why general public are not so content while Chinese economy still grows rapidly in recent years.Based on above observations, this thesis plans to do thorough research on decentralization and regional competition under relative performance evaluation from both "vertical" and "horizontal" angles. Chapter Ⅰ is a brief review of related literature. Chapters Ⅱ, Ⅲ and Ⅳ are main body of the thesis.In chapter Ⅱ, we analyze how aim discrepancy between the central government and a local government affects the form of profit-sharing contract. More concretely, we assume that the central government cares harmonious development of two policy targets, while the local government can obtain "extra benefit" through unbalanced development. As a result, when offering profit-sharing contract, the central government should care about not only the overall incentive from local government, but also the reasonable allocation of this overall incentive among different policy dimensions. We find that the optimal profit sharing proportion has a nonlinear relationship with the local government’s propensity for extra benefit. That is, with the "extra benefit" propensity (represented by a parameter) increasing, equilibrium share of the local government first decreases, then increases and finally decreases again.Insofar as chapter Ⅱ analyzes decentralization "vertically", chapter Ⅲ and Ⅳ try to discuss its effects "horizontally", that is, how GDP tournament affect regional competition. Our main focus is the regional vicious competition and duplicative investment.In chapter Ⅲ, we introduce relative performance evaluation to oligopoly competition with homogenous product. According to game timing, we analyze Cournot and Stackelberg competition; and according to the form of relative performance evaluation (RPE), we analyze profit-based RPE and quantity-based RPE. We show that, regardless to RPE form, stronger RPE will induce fiercer regional competition because it lowers each firm’s perceived cost. When RPE exceeds some threshold level, vicious competition will occur, that is, market price will be lower than marginal cost.In chapter Ⅳ, we introduce both kinds of RPE into differentiated product competition. By employing location model, we can consider not only vicious competition, but also duplicative investment. In our conception,"duplicativeness" means that two firms are finally located too near along the linear city. We find that, regardless to the form of RPE, stronger RPE will induce fiercer price competition. Furthermore, if RPE exceeds some threshold, duplicative investment will occur.Finally, chapter V concludes the thesis with a brief discussion of the potential policy implications and some possible extensions for further research.