Do Transfer Payments Weaken The Efficiency Of Local Governments' Fiscal Expenditures?

In the context of the "new economic normal",Chinese government has "reduced revenue and increased expenditure",which intensifies the contradiction between fiscal revenue and expenditure.How to improve the efficiency of fiscal expenditure has attracted attention.Since the reform of the tax-sharing system in 1994,the central government has gradually collected financial power and supplemented local financial resources through transfer payments to coordinate the contradiction between centralized tax power and decentralization.Intergovernmental grants have accounted for about 40% of local fiscal expenditure.Previous studies believe that intergovernmental grants can play an important role in equalizing regional financial resources,guiding regional allocation of resources,and correcting the externalities of regional public goods supply.Yet,few studies focus on the impact of them on the cost efficiency of local governments.This paper attempts to bridge the gap by probing into whether balanced transfers and special transfers can improve the cost efficiency of local governments.We first use the FDH model and the super-efficiency DEA model to measure the cost efficiency of governments at county level in China.The results show that the Chinese county governments' cost efficiency level is low,and there are differences in the efficiency levels of the eastern,central and western regions.The western region on average is the most efficient,and next follows the central region,while the western region stays the lowest.This paper continues to analyze the effects of two different types of intergovernmental grants on the cost efficiency of local governments and its mechanism on a theoretical and empirical basis: cost efficiency measures the allocation of local government budgets to public expenditure and personal expenditure.In the background of local governments competing through economic expenditure,when the central government reduces the equalization coefficient of balanced transfers or increases the matching ratio of special transfers,on the one hand,local governments are encouraged to expand the scale of public expenditure.However,the expansion also enlarges the tax base and increases the revenue of local governments,which provides more resources for local officials to pursue their own interests.The cost efficiency depends on the balance of these two effects.Finally,this paper takes a sample of 579 county governments in China from 2003 to 2007,using panel fixed-effect model and Tobit model for empirical testing.We find that compared with balanced transfer payments,special transfers significantly reduce local governments' cost efficiency.