"Leviathan's Hypothesis" And China's Fiscal Dependents

This paper investigates the impacts that China's economic decentralization reform exerts on the size of fiscal dependents including government agencies and service units at the provincial level by establishing a panel data model, verifies the validity of the hypothesis of Leviathan Hypothesis proposed by Brennan and Buchanan(1980) and tries to find the underlying mechanism.On the account of fiscal decentralization literature, two stages has been undertaken:the first stage focuses on the theories of providing the optimal public goods, and the second stage studies on the theories of the impacts that fiscal decentralization exert on local government and economic growth premised on the comparison study of Russia and China. The concept of Chinese Style fiscal decentralization stresses on the Chinese characteristic of fiscal decentralization, a character indeed boosting China's economic growth in the preliminary phase of economic transformation, so the benefits derived from economic decentralization exceed its cost. At a later stage of economic transformation and growth, however, the cost grows fast and all kinds of issues emerge. There are also no fix voices on the relation between fiscal decentralization and the size of government in the literature. The validity of Leviathan Hypothesis is still needed to be further discussed. On the summary of the institutional background of China' s fiscal system and government agencies and service units, this paper finds the repeated process of fiscal system decentralization and the vicious circle of fiscal dependents, a circle of reduction, expansion, re-reduction and re-expansion.Empirical study presents the relationship between fiscal decentralization and fiscal dependents based on the econometric model. On the part of fiscal decentralization measurements, all kinds of fiscal decentralization measurements are compared. After testing their validity, local fiscal autonomy is chose to measure fiscal decentralization. Relevant control variables are also tested to see their validity. The findings derived from panel data model at provincial level and FGLS estimations reveal that fiscal decentralization does curb the total size of fiscal dependents; Wagner law and Economies of Scale Theory hold true; the increase of urbanization rate and urban and rural income ratio boosts the size of fiscal dependents; on the contrary, the increase of aging people decrease the size of fiscal dependents. Further studies on the size of government agencies and service units show that fiscal decentralization can only curb the size of fiscal dependents in the service unit while have no such influence on the government agencies,accounting to Chinese style fiscal decentralization that attaches more importance to productive fiscal expenditure and the fiscal expenditure influences that fiscal dependents in the government agencies have on local governments. Based on the robust results from SUR model and GMM estimation, this paper proposes some corresponding policies and suggestions finally.