China Intergenerational Income Elasticity And Local Government Fiscal Expenditure

This paper studies the Intergenerational Elasticity of Earnings in the empirical and theoretical framework. In the empirical part, we find that local fiscal expenditure in China could increase the Intergenerational Elasticity of Earnings. This implies that our government spending cannot help the poor get rid of the limitation of budget constraint and the poor cannot get the proper opportunity of upper mobility. To explain these empirical results, we consider the micro-institutional features of China. Firstly, there are key schools in the education market which have sharp advantage of education quality. We construct a model of general equilibrium to point out that if fiscal spending releases the budget constraint of key schools, the relative dropout rate will increase. Secondly, family income is a kind of private information. Asymmetric information makes government cannot allocate fiscal subsidies on the poor accurately and leads the unintentional reverse mechanism of public finance. Thirdly, in pursuit of rapid promotion, local officials have strong political incentive to subsidize the elites with high productivity and get the intentional reverse mechanism. These micro-institutional features will perform jointly to make fiscal spending increase the Intergenerational Elasticity of Earnings. Compared with the existed literature, the contributions of this paper are the evolution from static analysis to dynamic research of income distribution, from computation of IGE to exploration of the main influence factors and from family explanation perspective to the micro mechanism, such as budget constraints of educational markets, asymmetric information of family wealth and political incentive of promotion.