The Causes Of Excess Public Investment Of Local Governments

This paper analyses the causes of the excess local government investment and its externalities symmetrically with the game theory which is a comprehensive application of the New Institutional Economics, including "property-rights analysis", "transaction costs economics", and "contract theory". It proposes that the local government officers will have an excess public investment in a soft constraints system with the double incentives in both economic and political interests.Institutional environment in this paper are mainly as follows: the confliction between the constitutional rights and de facto property rights; the access of the land is held in governments at all levels; the main indicators on the local government officials are local GDP and their taxation under the current political performance evaluation system; local citizens and local People's Congress could not have a effective supervision on the behaviors of the local government officials.After a concise description of the institutional environment, this paper analyses the economic incentives for local government officials under a three-side game model. We find that it is the "rational choice" to increase the public investment for local officials under the interests' seduction and deficient supervision from local citizens and local People's Congress; the political promotion incentive is another important variable for local government officials when they make the decision of public investment under the current political performance evaluation system. The "prisoners' dilemma" in public investment among local governments is also have a close relation to the political promotion incentive, which distorts the public investment behaviors of local governments and causes the excess public investment.Finally, this paper proposes some polices recommendations to rectify the excess public investment of local government. We must focus on there aspects to prevent the opportunism behaviors of local government: to restrict the capture of public resources of local government and rent-seeking in public investment according to clarify the property rights in the perspective of property rights reform; to increase the superintendence of local Peoples' Congress, especially the examining and approval in public investment in the perspective of democratic reform; and to take the local government officials incentive into consideration when the superior government enact the relative public polices, which is a decisive to ensure the characteristics of incentives compatibility and self-enforcement of public polices.