Fiscal Expenditure Competition of China's Local Governments: The Characteristics and Its Effects on Capital Allocation

Chinese fiscal decentralization reform inspires the local governments’ enthusiasm of developing region’s economy and intensifies the competition between local governments. Using a large dataset at city level from 1985 to 2012, this paper analyzes the characteristic and regional difference of fiscal expenditure competition, and studies the effects of expenditure competition on capital allocation. The estimation results show that imitative interaction of productive expenditure has positive effect on capital allocation efficiency, while the strategic imitation of social expenditure and administration expenses impede efficient allocation of capital. The different effects can be contributed to the essential characteristic of fiscal competition in China. Finally, it is propose that the official's achievement assessment system based on economic growth rate should be reformed. A more perfect performance assessment system should conclude not only local GDP but also the productivity of the public services and recourses allocation efficiency.