Study On The Effect Of Local Government Competition On Local Government Size Based On The Fiscal Decentralization

The government size cannot expand at will under the effective market economysystem, so how to restrain the government size effectively is worldwide challenge. Inthis paper, at the beginning we describe the Chinese reform of decentralized financesystem from1949to now, and analyze the different competing forms of localgovernment. And then we do an empirical analysis on Leviathan Hypothesis. Finally,this paper brings up some policy suggestion on how to optimize the local government.After confirming the research objectives, research ideas and research methods, thispaper analyzes the mechanism of action of the Leviathan Hypothesis theoretically. Theeffective Leviathan Hypothesis should depend on two conditions:①The organizationand resident in the area can flow freely.②The financial expenditure of localgovernment must all from the own financial revenue. Then we describe the changes ofChinese local government size with the data in China Statistical Yearbook, and we findthat Chinese local government size is expanding and existence significant regiondifferences. The main conclusions of this paper are:(1)The core connotation of Chinese fiscal decentralization is the restrain ofcentralized political system to fiscal decentralization. During the reform of Chinesefiscal system, the decentralization shows the imbalance between expendituredecentralization and revenue decentralization, and the expenditure decentralization isgreater than revenue decentralization. So, the local government is up against severefinancial pressure, it must expand its size for fulfilling the public expenditureresponsibility.(2)This paper sets different kinds of fiscal revenue decentralization index and fiscalexpenditure decentralization index through the different treatment on transfer incomeand the different options of per index, and also sets the characteristic index of Chineseeconomic transition. After the empirical test, we find that all the fiscal decentralizationindex have positive correlated with local government size, so, the Chinese fiscaldecentralization system cannot restrain the local government size effectively, theleviathan hypothesis is not found in China. The transfer income from centralgovernment and the determination that central government maintains the stability ofpolitical system motivate the expansion of local government size, the flying paper effectand fiscal vertical imbalance effect is found in China. Along with the transition to the effective market economy system, the development of national economy trends to prefera smaller government size. The government should not interpose the national economyheavily, but fulfill the servant responsibility.(3)The local governments are up against double pressure of political competitionand fiscal competition under the integration of centralized political system and fiscaldecentralization system. The political competition is based on the economy assessment,so, the local governments take different forms of competition, including tax competitionand fiscal expenditure competition. The different forms of competition among localgovernments have different effective on local government size. Through the empiricaltest, this paper find that the tax competition can restrain the local government sizeeffectively, but the fiscal expenditure competition promotes the expansion of localgovernment size. The empirical test result to the control variables also suggests that weshould restrain the local government size.(4)The countermeasures to optimize the local government size include: improvethe performance assessment to the local government, and implement diversificationperformance assessment institution; enhance the quality of local government officials,promote the governing capacity of local government; reasonably arrange expenditureresponsibility between the central government and local government; optimize thestructure of the fiscal expenditure, increase efficiency of the fiscal expenditure.