Local Endowments, Yardstick Competition And Local Government's Behavior: Theory Analysis And Empirical Study

China's local governments play an important role in promoting economic development, which is related with China's unique governance mechanism. However, when local governments play an active role, their behaviors also contain undesirablities, and vary in different regions, especially when local endowments vary a lot. This paper mainly study the differentiation of local government behavior under yardstick competition.The combination of economic decentralization and political centralization is China's unique governance mechanism, and this mechanism causes top-to-down yardstick competition among local governments. Under yardstick competion, the homogeneous local governments which are in political championship imitate each other and take similar competitive strategy. Under China's current evaluation system which mainly focus on GDP, the homogeneous local governments increase the supply level of economic public goods, improve governance and promote marketization process one after another, to attract mobile capital and promote economic development. However, when endowments vary a lot among regions, poor endowed regions may give up competition for the shortage of competitive advantage. Empirical analysis shows that China's local governments vary a lot in participating in competition, and local endowment is an important factor. This paper establishes a mathematical model to study under yardstick competion initial endowments' impaction on local governments' behavior, concludes:well endowed regions have higer supply levels of economic public goods and more serious supply structral distortions; but in poor endowed regions, the situation is the opposite. The difference of initial endowments cause the differentiation of local government behavior. The following empirical researches support these conclusions. Using provincial panel date from 1994 to 2006, we study yardstick competition and initial endowment's impact on the acts of public goods supply, and discuss their diffrence in different regions and different periods. Finally, chapter 5 points out the negative effects brought by the differentiation behavior of heterogenous local governments and puts forward appropriate policy recommendations.The innovation of this article is that it brings endowments into the framework of yardstick competition and researches the differentiation of local government's behavior under yardstick competition creatively. However, there are many shortcomings in this paper, the choice of some indicators is not perfect, the analysis of welfare in the aspect of structral distortions in the supply of public goods is ommitted and needs improvement.This paper is organized as follows. Chapter 1 proposes questions, surveys the literatures concerning the theme, and explains some important concepts. Chapter 2 discuss the system causes, manifestations and intensity differences of local governments' yardstick competition. Chapter 3 establishes a mathematical model to analyse the impact of initial endowments on the supply of public goods under yardstick competition and capital mobility and immobility. Chapter 4 gives an empirical test. Chapter 5 points out the efficiency losses of the differentiation of local governments' behavior and proposes policy recommendations. Chapter 6 concludes.