Fiscal incentives, competition, and investment in China
Lv, Bingyang; Liu, Yongzheng; Li, Yan; Ding, Siying (20.11.2018)
Numero
20/2018Julkaisija
Bank of Finland
2018
Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi:bof-201811212139Tiivistelmä
This paper explores how fiscal incentives offered to local governments in China affect investment rates in their jurisdictions. Theoretically, we build a simple fiscal competition model to establish the linkage between local fiscal incentives and expenditure policy and consequently, capital movement. The key prediction of the model, borne out by data from Chinese provinces spanning 2004–2013, is that an increase in the local corporate income tax-sharing ratio, which proxies fiscal incentives offered to local governments, motivates local governments to compete for capital investment through increased public expenditures. Our results contribute to the fiscal federalism literature by showing that local fiscal incentives significantly shape policy choices and local economic performance. In addition, by exploring fiscal incentives offered to local governments, we offer a novel explanation for the unusually high investment rate in China that has been sustained over a prolonged period of time.
Julkaisuhuomautus
Published in China Economic Review
Volume 59, February 2020, Article 101371 https://doi.org/10.1016/j.chieco.2019.101371
Volume 59, February 2020, Article 101371 https://doi.org/10.1016/j.chieco.2019.101371