The Urban Intergovernmental Fiscal Expenditure Competition And Welfare Effect Under The Objective Of "Harmonious Society" In China

After the tax reform in 1994, Competition for GDP between the local governments in China under the system of fiscal decentralization has promoted China's economic growth and ignored the people's livelihood at the same time.Currently China is transforming from the pursuit of simple economic growth towards the pursuit of "the people's livelihood and harmony", the major tasks of the central government is the development of the people in China. The central government show increasing attention to the issue of "the livelihood of the people",and they put the “people's livelihood” into the assessment of local government officials as the key performance indicator in order to encourage local governments to pay more attention to the overall welfare and economic development in the jurisdiction.This paper tests specifically whether political yardstick competition(competition for the people's livelihood and harmony) can explain expenditure interaction effects among local government departments in China recent years through theoretical analysis and empirical research. The research set up a general equilibrium Model about how the local government make financial decisions under the system of fiscal decentralization. It explained mechanism of fiscal expenditure interaction among local governments under different performance evaluation indicator systems. The empirical investigation is conducted on a panel of 281 municipalities, from 2008 to2012. It sets forth the spatial Durbin model with spatial and time-period fixed effects and estimate the model using maximum likelihood estimation(MLE) to test for the political yardstick competition. Results show that the city governments imitate each other in basic public services policy while other cities' governments in the same province increase basic public services expenditure, the city's municipal government officials would also increase the basic public services expenditure. By segregating the competition effect of basic public services expenditure in the first equation, it explained the differences between the residents' welfare. Econometric estimation results show that the competitive effect of basic public service expenditure of local government has significant positive contribution to residents' welfare.