Strategic Interaction Among Local Governments And The Effects On Public Goods Provision

Since the opening up and reform in1980s, China experienced rapid economic development with both centralization and decentralization process. The tax-share reform in1994deprived local governments’tax rights. As a result, financial difficulties face local government and the provision of local public goods has been threatened. Competition for capital, special transfers and economic development occur among local governments. This brings further problems, such as local debt crisis, fast increase of apartment price and unbalance of public goods provision.A large number of studies on government competition have been done. Scholars focus on various aspects of this topic. Some relative subjects, such as decentralization, efficiency, corruption as well as provision of public services, attract the academia’s attention. Econometric methods are widely used in detecting the vertical and horizontal government competitions. The evidence of government competition in US, Finland, France and Italy have been proved and scholars found different effects of competition from economic development and other social indicators.In China, since the opening up and political reform, studies on decentralization and relationships among different tiers of governments become popular. Some work has been done and both positive and negative effects of government competition have been found. This paper focuses on a much lower level of government—county in China and tries to make a clear clue of incentives and tools for local governments to engage in intergovernmental competition. Spatial econometric method is used for certifying the existence of county level competition for FDI, grants and rapidly growing GDP. Using operating expenses for education as the dependent variable, the impacts of spatial competition among local governments on the provision of public goods has been estimated. The result coincides with theories and social reality.The conclusion of this paper is that the spatial econometric analysis finds important influence of neighboring variables on a county’s public education investment. They reveal the mimicking behaviors of counties competing for foreign direct investment, special transfers, officials’ promotion and economic growth at a high speed. It is an urgency to alleviate local governments’finance problems and ensure the provision of public services. The official promotion mechanism should be improved and strict supervising systems are necessary for making sure of the fiscal transparence and public democracy.