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Fiscal Incentives or Promotion Tournaments: A Debate on the Institutional Engine Driving China's Economic Growth

【Authors】
LV Bingyang, CHEN Yixin
【WorkUnit】
Renmin University of China, 100872.
【Abstract】

Local governments have played an important role in China's economic miracle. As to the institutional reason for this phenomenon, there have always been two theories: promotion tournaments in political matters and financial incentives in economic matters. We summarized seven laws of local governance in China: differentiated rather than unified standards, combination of qualitative and quantitative assessment, vertical rather than horizontal comparison, the role of collectives rather than individuals, comprehensive rather than single-item assessment, political constraints rather than incentives as main means, and relative information transparency rather than information asymmetry. Under these laws we found little room for the promotion tournaments. The fiscal incentive system indicated by the inter-government fiscal relationship has always been an important institutional arrangement to motivate local governments in China. The tax-sharing system is a flexible revenue-sharing contract system. It contains rich information about revenue distribution, effort and risk sharing among governments, and can mobilize the enthusiasm of governments at all levels to develop economy according to conditions at that time and in that place concerned. Empirical analysis finds that fiscal incentives explain 17.98% of local economic growth and 31.63% of local investment growth, while the impact of promotion tournaments is not significant. The research findings contribute to clarifying the controversy about the institutional engine behind China's local economic growth。

  

JEL:H77, P16, E62

【KeyWords】
Fiscal Incentives, Political Incentives, Local Government Behavior, Economic Growth