Essays on Federalism and Local Finance in China

This dissertation consists of three chapters that cover topics on federalism and local finance in China. Chapter 1 - Economic Growth, Fiscal Inequality and Fiscal Decentralization: Evidence from China. This paper investigates the impact of inequality in the geographic distribution of fiscal resources on regional economic growth under fiscal decentralization policy in the context of China\u27s experience, using panel data for 28 provinces over the period 1987–2010. In the recent past, the structure of decentralized government in China has undergone two significant fiscal reforms: the ``Fiscal Responsibility System (FRS) in 1987-1993, and the ``Tax Sharing System (TSS) in 1994. I find that there are different impacts of overall fiscal inequality on economic growth pre-and post-1994. Second, I show that fiscal decentralization could improve regional growth in China. Finally, this paper finds that the use of extra-budgetary funds could reduce the economic growth gap between rich and poor provinces. Chapter 2 - Fiscal Decentralization and Local Economic Growth. This paper develops an endogenous growth model with spillovers of public goods and mobile capital to examine economic growth and social welfare under decentralized and centralized systems. I first consider a setting with an exogenous ratio of productive government expenditure to the total expenditure and then a model with the endogenous ratio. In both cases, growth rates are lower and social welfare is higher for both the developed and the less-developed regions in the centralized system than in decentralized systems. Finally, I also use a fiscal decentralization reform in China – namely, the province-managing-county (PMC) reform – to examine the effects of fiscal decentralization on local economic growth. The PMC reform abolished the subordinate fiscal relationship between prefectures and counties and transferred much of the tax and spending authority from the prefecture to the county level. Chapter 3 - Local Fiscal Competition and Deficits in China (with Timothy J. Goodspeed). This paper adds to the literature by examining fiscal competition and deficit financing by local governments in a developing country, China. We examine a unique revenue source in China, land-use premiums (a type of property tax), in a panel dataset consolidated at the prefectural level from 2006 to 2016. Our results indicate that fiscal competition in land-use premiums exists and is stronger among wealthier than poorer local governments, a result that supports the view of \cite{cai2005does} that competition among asymmetrically endowed regions can lead to less discipline. Moreover, we find higher local deficits are associated with lower land-use premiums, a result that suggests that the local government does not fill any fiscal gap with own revenues