Local Government Competition And Resource Allocation Efficiency

This paper investigates the impact of local government competition on theefficiency of resource allocation using Chinese manufacturing firm-level data andcity-level macro data from1998to2007. First, we compare four different methods todecompose productivity, and choose the dynamic OP decomposition to obtain theefficiency of resource allocation from the total productivity decomposition. Thedecomposition results show that each level of the total productivity have continued toincrease, but the changes of the efficiency of resource allocation in the central andwestern regions has been negative since2003, and its magnitude is sufficient to leadto a reduce of the country’s total efficiency of resource allocation. In addition, after2002, compared to non-state-owned enterprises, the efficiency of resource allocationof state-owned enterprises decreased more rapidly, especially in the central andwestern areas; non-exported enterprises’ allocation efficiency decreased rapidly thanexport enterprises. In order to examine the impact of competition in the localgovernment on the efficiency of resource allocation, we choose the relative tax rate ofFDI companies as the local government competition indicator, like Fu Yong andZhang Yan (2007). Full sample regression shows that local government competitionwill improve the efficiency of resource allocation. In order to find out the relationshipbetween the local government competition and market competition, we divide the fullsample is into a high market-oriented group and a low market-oriented group andregress. The results show that, in the low market-oriented group, the localgovernments are more competitive, and the competitions play a more important rolein the resource allocation efficiency; in the high market-oriented group, therelationship is not significant. Therefore, this paper argues that the central governmentshould trade off more on the decentralization and centralization of power. A properway is to be recovered the financial right in the east, and to decentralize the right andencourage competition in the central and western regions. This can not only enhancethe efficiency of resource allocation, but also narrow the gap between the rich and thepoor through secondary distribution.