Working Paper: NBER ID: w25296
Authors: Wei Xiong
Abstract: China's economic reforms over the past 40 years have led to a mixed economic structure with the government playing a key role in an increasingly market-driven economy. This paper expands a standard growth model of Barro (1990) to incorporate this structure, with a particular focus on including the agency problem between the central and local governments. To incentivize local governors, the central government has established an economic tournament, which generates not only intended incentives to develop local economies, à la Holmstrolm (1982), but also short-termist behaviors, à la Stein (1989). The latter channel helps to explain a series of challenges that confront the Chinese economy, such as overleverage through shadow banking and unreliable economic statistics.
Keywords: No keywords provided
JEL Codes: E02; G18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Economic tournament (D44) | Infrastructure investment (H54) |
| Infrastructure investment (H54) | Regional economic output (R15) |
| Increased infrastructure investment (H54) | Higher productivity for local firms (O49) |
| Higher productivity for local firms (O49) | Local economic growth (O29) |
| Central government's reliance on regional output for performance evaluation (H10) | Feedback loop of local governors prioritizing immediate economic gains (F69) |
| Local governors' career incentives (J62) | Overinvestment in infrastructure (H54) |
| Local governors' career incentives (J62) | Manipulation of economic data (C82) |
| Local government leverage (H70) | Return on capital (G31) |
| Overreporting of GDP (E10) | Local government leverage (H70) |