Working Paper: NBER ID: w16694
Authors: Roger H. Gordon; Wei Li
Abstract: What are the incentives faced by local officials in China? Without democratic institutions, there is no mechanism for local residents to exercise "voice". Given the hukou registration system, local residents have little opportunity to threaten "exit" if they are unhappy with local taxes and spending. This paper explores an alternative source of incentives, starting from the premise that local officials aim to maximize the jurisdiction's fiscal residual (profits), equal to local tax revenue minus expenditures on public services. In a Tiebout setting with mobile households, this objective should lead to efficient provision. What happens, though, if firms and economic activity but not people are mobile? The paper examines the incentives faced by local Chinese officials in this context, and argues that the forecasted behavior helps to explain both the successes and the problems arising from local government activity in China.
Keywords: Local Government; Fiscal Institutions; Government Behavior; China
JEL Codes: H70; H71; H38; P16; P43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local officials in China are incentivized to maximize their fiscal residual profits (D22) | Behavior that prioritizes tax revenue generation over efficient public service provision (H29) |
| Lack of accountability mechanisms (such as elections or the ability for residents to exit poorly performing jurisdictions) (D72) | Behavior that prioritizes tax revenue generation over efficient public service provision (H29) |
| Hukou system restricts mobility (P25) | Limits competitive pressures that might incentivize officials to act in the public's interest (D73) |
| Lack of effective oversight and design of fiscal incentives (H29) | Inefficiencies in resource allocation (D61) |
| Reforms aimed at altering fiscal incentives (H31) | More efficient outcomes (D61) |
| Market reforms and changes in tax structures over time (E69) | Alter local officials' behavior in ways that could mitigate or exacerbate existing inefficiencies (D73) |