Financial Competition And Return On Capital Between Regions

Since Chinese fiscal decentralization, under the financial incentives and the political incentives, fiscal competition between local governments appears. Fiscal competition plays an important role in economic development. There is tax competition and fiscal expenditure competition among local governments in order to attract scarce economic resources, such as capital. Through tax or infrastructure, these kinds of competition influence the investment environment, and become impact factors in the rate of return on capital among regions. This paper analyses the relationship between fiscal competition and return on capital. Fiscal competition influences the return on capital, through tax burden between regions, public capital investment and Privatization, and have explanatory power on the differences of the rate of return on capital.This paper includes: firstly, summarizing the main form of the fiscal competition among local governments and the causes of it, based on absorbing the predecessors' achievements. Secondly, the paper analyzes the difference of the rate of return on capital in all regions with the latest data. Discuss and analyze the relationship between current local fiscal competition and the difference of the regional return on capital with empirical analysis method. Thirdly, this paper analyzes the impact of fiscal competition to the return on capital from the difference of regional tax burden, difference of public capital investment, difference of education investment and difference of privatization level.The first chapter in this paper introduces existing theories of domestic and foreign country about financial competition and return on capital. The second chapter estimates the rate of return on capital in different regions since tax distribution, and analyzes the trend of that. The third chapter analyzes the situation of the local governments' financial competition in China, including background, causes and the main form. The forth chapter compares the difference of regional tax burden, difference of public capital investment, difference of education investment and differences of privatization level using data of different years, this paper analyzes the relationship between fiscal competition and the difference of return on capital. The fifth chapter concludes that there is a correlation between fiscal competition and different rate of return on capital.