Studies On Local Government Debt Risk Management Based On Game Theory

Our huge government debt, as of June2013more than20trillion, shows anincreasing number of expansion. If local government debt risk is not efficientlyprevented and promptly resolved, it leads to incalculable consequences of China’sfinancial security and social stability. Therefore, learning from the experiences ofgovernments debt management of developed countries, researching status and impactof local government debt risk, analyzing the risk-forming mechanism of localgovernment debt and finding effective solutions, has become the primary problem ofChina’s economic development. The forming process of Local government debt havebeen playing a positive role in making up for lack of financial resources, improvingpeople’s lives, protecting ecological environment and promoting the sustainabledevelopment of the local economy and society. However, from another perspective,the rapid expansion of local government debt will affect the healthy development ofthe social economy, which will trigger great financial crisis when it is out of control,resulting in social instability.This paper firstly summarizes the current situation and the impact of China’slocal government debt risk, then according to the game theory, establishing tripartitemodel of incomplete information dynamic game among banks, local government andcentral government, on the basis of the tripartite analysis of dynamic game model,refining the game analysis of the financial system where the parties are under softbudget constraints, the financial and taxation system where financial authority andpowers mismatch, imperfect transfer payment system and unreasonable officialevaluation mechanism about promotion, using the method of a combination ofdynamic game and static game, integrating the incomplete dynamic game model toanalyze the forming mechanism of local government debt risk under a tripartite game.Policy recommendations section corresponding the above analysis of game proposesthe establishment of local government bankruptcy mechanism to break the SBC (softbudget constraint), and other recommendations to improve fiscal and taxationsystem, and proposes the fundamental way to resolve local government debtrisk--allowing the issuance of municipal bonds in order to solve the condition of theincreasing demand of debt and the increasingly debt risk.This paper is divided into five chapters.The first chapter is an introduction. This chapter briefly introduces the background, significance, technological route, context, method and innovation andinsufficiency of the research.The second chapter is the summary of China’s local government debt risks. Thischapter respectively summarizes the meaning and classification of local governmentand local government debt risk, presents the control measures of local governmentdebt risk of United States and India and its implications for China ’s local governmentdebt management.The third chapter analyzes the current situation of China’s local government debtrisk and its impact. This chapter begins with the specific analysis of the status ofChina’s current debt，then study the negative impact caused by local government debtrisk. Chapter IV is constructed based on game theory, building an dynamic gamemodel of incomplete information and the pros and cons of static game matrix, usingthose two models specific analyzing the forming mechanism of China’s localgovernment debt risks.Chapter V proposes approaches to resolve our current local government debt riskmanagement, considering improving the regulations of local government debtmanagement and issuing local bonds.