Summary： China's economic slowdown causes a series of potential issues that demand further research regarding long-term economic growth and policy reorientation. However, some prominent economists criticize modern growth theory for its failure to explain and address the serious problems of the sluggish global economy. In recent years, after reaching a middle-level development stage, some fast-growing emerging countries have suffered abnormal declines in their long-term growth potential. To address current economic issues, an elaborate analysis of the lessons learned from the development experience of high-income economies is highly needed. Moreover, the theoretical perspective and the need to address current world economic issues both highlight “demand restriction”. In this paper, we focus on the demand restriction on long-term economic growth. First, we comment on the fallacy of modern growth theory that ignores the effect of demand, and then we analyze the historical experience of high-income countries that have successfully upgraded to the advanced stage of development. Based on these analyses, this paper studies the long-term growth of the Chinese economy and discusses some major policy issues.
This paper broadens the framework and coverage of growth theory from a political economy perspective to improve the theoretical relevance of research on Chinese economic growth. This is particularly relevant for China after the emergence of the economic New Normal that requires a deepening economic reform, as it promotes the adoption of an updated model of stable and moderately fast growth. From a political economy perspective, growth theory provides some insights. First, in addition to the study of productive force, the issue of production relations should be highlighted. It is essential to explore the effects of institutional changes and reforms on economic growth. Second, besides production, it is important to study distribution, exchange, and consumption, and their effects on economic growth. Third, besides the role of market system, the role of state policy should be re-evaluated. It is crucial to analyze the effects of the changing mechanism and the relation between market and state on economic growth.
We investigate the theoretical basis, background of application, and path dependence of modern growth theory, and analyze how stylized facts weaken the implication of modern growth theory. First, as modern growth theory ignores the role of demand on macroeconomic growth, it is difficult to address and explain the issue of insufficiency of aggregate demand on economic growth. Moreover, as modern growth theory downplays the effects of demand structure dynamics, it fails to solve the restriction of demand structure on economic growth. We think that addressing these issues is particularly urgent and important not only for the sluggish world economy, but also for China after moving toward a new stage of development.
This paper also reviews the trend of economic slowdown of Japan, Korea, and the Taiwan Province of P.R. China after they reached an advanced stage of development. We provide a thorough analysis of demand restriction on long-term economic growth and use the case of Japan to explain the mechanism. The findings show that the main reason for the declining long-term growth of these economies after they reached a high income level or advanced industrialization lies in a sharp drop in domestic demand, particularly the significant decline in investment rather than the fluctuation in export.
This paper offers some policy suggestions based on theoretical and historical analyses and an analysis of the trend of the Chinese economy. As demand expansion played an indispensable role in China's past high growth, China's long-term growth in the future should still largely be affected by the changes in demand. The determinants of the demands on long-term growth cover both supply structure and demand structure. To secure a sustainable economic growth, China needs to coordinate supply-side structural reform and demand-side structural reform.
Keywords： Political Economy; Long-term Economic Growth; Demand; Growth Theory; International Experience

Summary： Knowledge capital is the core factor of innovation-driven development, which is the key driving force for promoting total factor productivity (TFP) under the New Normal, and represents an effective way to achieve sustainable economic growth. Based on dividing domestic knowledge capital into R&D capital (RC), human capital (HC), innovation infrastructure capital (IC), and technology capital (TC), and dividing foreign knowledge capital into imported knowledge capital and FDI's spillover knowledge capital under the realistic situation of innovation-driven development, this paper uses a macro-knowledge production function model to analyze the effects of different knowledge capital factors on the total factor productivity of different economies. This method provides both a theoretical basis and a decision-making reference to improve the innovation-driven development strategy by recognizing the transformation of China's economic development mode and maintaining sustainable growth. To reflect both the principle of globality and data availability, this paper uses the panel data of 130 economies from 1981 to 2010, with data coming from the UNESCO Data Centre and UNESCO Statistical Yearbook (1981-1999), the World Bank WDI Database and WITS Database, CANA Database, Barro-Lee Educational Attainment Dataset, USPTO Database, and Science Citation Index Database. First, the paper measures domestic knowledge capital and its sub-items (R&D capital, human capital, innovation infrastructure capital, and technology capital) index by constructing an index system. Second, it measures foreign knowledge capital and its spillover channels (import and FDI) index through a share weighting method. Finally, it divides the 130 economies into innovation leaders club, innovation followers club, and innovation slow club through a hierarchical clustering method based on the knowledge capital index of each economy, then applies group mean fully modified least squares (GM-FMOLS) to empirically study the relationship between knowledge capital and total factor productivity. The findings show that both domestic knowledge capital input factors and foreign knowledge capital spillover channels are important factors that influence the total factor productivity improvement in terms of global samples. Yet, there are obvious differences in the degree of influence of the different knowledge capital factors on the various innovation clubs: R&D capital, technology capital, and FDI spillover channel have the maximum promoting effect on the innovation leaders club compared with the innovation followers club and the innovation slow club. Human capital and the import spillover channel have the maximum promoting effects on innovation followers club compared with the innovation leaders club and the innovation slow club. Innovation infrastructure capital and the technology gap channel have the maximum promoting effects on the innovation slow club compared with the innovation leaders club and the innovation followers club. China is now at the important transition stage from an innovation follower country to an innovation leader country; therefore, innovation policies should focus on promoting the effective allocation of innovation factors. Regarding domestic knowledge capital, we should further increase R&D capital and technology capital investment in addition to continuously strengthening human capital and innovation infrastructure capital investment, to reach the average level of R&D capital and technology capital of innovation leaders club and achieve the maximum promoting effect of domestic knowledge capital on total factor productivity. In terms of foreign knowledge capital, China should not be content with the passive spillover effect of technology gap on total factor productivity. Instead, we should positively develop foreign trade and foreign investment policies. Not only should we further optimize the country structure and commodity structure of import trade and achieve the positive effect of the import channel, but we should also pay attention to the quality and efficiency of FDI. Specifically, we should expand investment contacts with economies that are rich in knowledge capital stock and actively utilize the innovation achievement of innovation leaders' economies' FDI to achieve the maximum promoting effect of foreign knowledge capital on total factor productivity.
Keywords： Knowledge Capital; Total Factor Productivity; Innovation-driven Development; Innovative Policy

Summary： China's investment has grown in recent years. Despite a slight drop in some years, investment has never faced a sudden collapse. China has one of the highest investment rates in the world, about 47.8% of its GDP in 2013. The leaders of China have realized the unsustainability of economic prosperity through investment-driven economic growth, resulting in China's rapid economic growth over the past 30 years. Since the global financial crisis in 2008, the world economy has been depressed, while the Chinese economy has entered a New Normal state. Recently, the policy keywords of “Three go, one down and one fill” that refers to “capacity reduction”, “de-stocking”, “deleveraging”, “cost reduction”, “improving underdeveloped areas” and “supply-side reform” are frequently mentioned. Economists are beginning to reconsider the traditional economic growth pattern and to explore the possibility of overinvestment and low efficiency in China. This debate produces academic reflections and important economic and policy implications for understanding the Chinese traditional economic growth mode.
In the current literature, authors study overinvestment at both macro and micro levels. At the macro level, three main approaches are used to determine overinvestment. The first approach uses the Golden Rule, which examines whether consumption is at maximum when it reaches the balanced growth path. The second approach uses the AMSZ test established by Abel et al. (1989). The third approach uses macro index variation analysis, such as the rate of return to incremental capital, the rate of return to stock capital, and investment productivity. Although these approaches differ from one another, the main idea is the comparison between cost and return. Based on the ideas above, this research aims at judging whether there is overinvestment in China by comparing marginal cost with marginal income.
There is a consensus regarding overinvestment. It is possible to use capital return to judge whether the investment rate is appropriate. There are two kinds of approaches to estimate the rate of return to capital. One uses enterprise-level data, the other uses macro-level data. The latter is widely used by economic scholars, such as Chou et al. (2015) and Tsutomu et al. (2016), because it has more advantages than the former. However, with the same rate of return to capital, different risk levels may still exist, so risk factors cannot be ignored when we use capital returns to evaluate investment efficiency. Therefore, based on the current methods in the literature for estimating the rate of return to capital at the macro level, this paper incorporates risk factors in the basic model, creates the method to measure the provincial rate of return to capital without uncertainty, and judges whether there is overinvestment in China at two levels.
The findings in this paper can be summarized as follows. First, the indicator of return to capital without uncertainty is better than the return to capital used in other literature. Second, our estimate of China's rate of return to capital without uncertainty increases from 8% to 15% in recent years. Third, there is a similar trend in the rate of return to capital between regions, as opposed to the increasing significant differences in absolute value. Fourth, the rate of return to capital without uncertainty in China shows a clear “inverted-U” shape as the economic development stage rises. Finally, more attention should be paid to the issue of overinvestment in China.
The contributions of this paper are the following. First, the influence of risk factors, which is omitted in other literature, is introduced in the paper to determine whether there is overinvestment in China. Furthermore, we construct our model to evaluate the rate of return to capital without uncertainty and overinvestment using the panel data of 29 provinces in China from 1993 to 2013, which differs from other methods used in related literature. Finally, we examine the issue of overinvestment at two levels. The first level is the “inverted-U” shape curve. At the second level, we compare the marginal product of capital with the rate of return to capital. The findings of this paper may provide some insights on overinvestment for future studies by proposing that risk factors cannot be ignored in future research.
Keywords： Without Uncertainty; The Rate of Return to Capital; Overinvestment

Summary： Under the economic New Normal, China has put forward the supply-side structural reform, which consists of five tasks including cutting overcapacity, destocking, deleveraging, reducing costs, and improving weak links. However, price distortion still occurs and may cause curing of the allocation structure, negative market players, and inefficient economic operation. Therefore, it is of great significance to study how to eliminate price distortion and optimize resource allocation to effectively promote supply-side structural reform and the long-term development of China's economy.
This paper builds a financial accelerator mechanism embedded with a soft budget constraint based on the theory of Bernanke et al.(1999), and explains the endogeneity of financing price distortion and resource misallocation caused by soft budget constraint. Then, we construct a DSGE model to explore the micro-mechanism and effects of the reform.
The innovation of this paper is mainly based on two aspects. It establishes a financial accelerator mechanism embedded with the soft budget constraint and makes price distortion endogenous. We derive the financing premium equation for soft-budget-constraint enterprises from the debt contract optimization problem between enterprises and financial institutions. It illustrates that the soft budget constraint can weaken the relevance of the finance premium on the leverage ratio and thus cause price distortion and resource misallocation. In addition, a DSGE model is constructed to describe the specific effect of the reform. Based on the soft budget constraint mechanism, the DSGE model describes six economic subjects, including the soft-budget-constraint enterprise and the budget-constraint enterprise. The micro effects of the five tasks of the reform can be qualified by the model parameters; therefore, it is possible to explore the outputs of the two enterprises and the overall economy in different reform scenarios with the model.
The results of the study are as follows. First, the problem of the soft budget constraint in some enterprises results in price distortion and resource misallocation. Due to the guarantee from the government, the financing price of soft-budget-constraint enterprises is relatively lower and cannot fully reflect the loan cost and risk premium. Thus, the soft-budget-constraint enterprise can borrow more capital at a lower price, which may lead to a higher leverage ratio and hinder the market from clearing. Second, the supply-side structural reform can boost the sensitivity of output to the shocks of interest rate, government spending, and technology by weakening the soft budget constraint, thereby enhancing the effectiveness of macro-control policies. Specifically, cutting overcapacity and destocking can reduce the proportion of soft-budget-constraint enterprises in the whole economy. Deleveraging can reduce the degree of loan guarantee of the enterprise. Reducing costs and improving weak links may improve the total factor productivity of enterprises, especially soft-budget-constraint enterprises. Our model shows that due to the limited resources and the crowding-out effect between these two enterprises, the reform can weaken the negative effects of the soft budget constraint and improve the effectiveness of monetary policy and fiscal policy. Third, the reform can significantly improve China's long-term growth trend. It is shown that by weakening the influences of the soft budget constraint and improving the total factor productivity of enterprises, the five tasks of the supply-side structural reform can promote China's steady economic growth for the next 20 years.
Based on these results, we propose that to promote the supply-side structural reform, first it is necessary to clear excess capacity and improve capital efficiency, strengthen the budget constraint and eliminate price distortion, and deepen financial reform and optimize resource allocation.
Keywords： Supple-side Structural Reform； Soft Budget Constraint； Financing Premium； Leverage Ratio

Summary： The long-lasting low interest rate monetary environment has been regarded as an important reason for the excessive risk accumulation of banking systems. Research in other countries is based on fully liberalized interest rate markets that cannot comprehensively illustrate Chinese issues. Research in China only focuses on the effect of the monetary environment on bank risk-taking, neglecting the effect of pro-cyclical leverage and implicit government guarantee on the mechanism through which monetary environment influences bank risk-taking.
Based on the data of Chinese commercial banks between 2006 and 2012, we find that regardless of the type of bank, the growth rate of total assets is always positively related to the growth rate of bank leverage, and leverage ratio always varies after the change of bank assets. In short, banks tend to adjust their balance sheets positively and increase their leverage when the volume of balance sheets increases. The pro-cyclical leverage adjustment is common in the Chinese banking sector, thus considering it can help us better understand the theoretical mechanism through which the change of monetary environment affects bank risk-taking. Additionally, for a long time, Chinese banks have been under the implicit guarantee of the government before the implementation of explicit guarantee. Compared with the explicit guarantee presented in the “Deposit Insurance Ordinance”, this implicit guarantee has more visible heterogeneity: government “parachutes” are often given to large banks that are “too big to fail” and banks that are owned by the government or have close relationships with the government. The heterogeneity of implicit government guarantee further complicates this theoretical mechanism.
The paper explores the theoretical mechanism through which the change of monetary environment affects bank risk-taking, by introducing the heterogeneity of implicit deposit insurance, capital adequacy constraint, and market discipline based on a D-L-M model (2010). The theoretical analysis shows the following. In a non-monopoly market, for banks with capital higher than a certain critical level, a low interest rate monetary environment can increase bank risk-taking through pro-cyclical adjustments of bank leverage. The implicit deposit insurance strengthens the pro-cyclical effects of bank leverage in low interest rate environment. The net effect of implicit deposit insurance on bank risk-taking is determined by the relative strength of charter-value effects and pro-cyclical effects. These results still hold when considering market discipline. A stricter capital regulation requirement and stronger market discipline help alleviate pro-cyclical adjustments of bank leverage. The net effect of market discipline on bank risk-taking is determined by the relative strength of pro-cyclical effects and risk-shifting effects.
Moreover, to support the appropriateness of the theoretical mechanism, the paper uses the panel data of China's 171 commercial banks during 2006-2012 for mechanism testing. The empirical analysis supports the channel of pro-cyclical leverage through which the monetary environment affects bank risk-taking for capital-adequacy banks. For capital-inadequacy and capital-binding banks, we find no evidence of the pro-cyclical leverage adjustment effect. The implicit guarantee amplifies the pro-cyclical leverage adjustment. Compared with the charter-value effect, the pro-cyclical leverage effect is the main determinant for the effect of implicit guarantee on bank risk-taking. Furthermore, the pro-cyclical leverage adjustment effect has been mitigated after 2010 with stricter capital regulation requirements. Strengthening market discipline can help refrain the pro-cyclical leverage adjustment. The negative relationship between market discipline and bank risk-taking indicates that the pro-cyclical leverage adjustment effect is the main determinant of this negative relationship, compared with the risk-shifting effect. Our results support the significant role of counter-cyclical capital regulation and explicit deposit insurance in dealing with the pro-cyclical adjustments of bank leverage and the excessive risk accumulation in the banking sector.
Keywords： Monetary Environment; Implicit Deposit Insurance; Pro-cyclical Leverage; Bank Risk-taking

Summary： A salient feature of China's financial risks is asset price bubbles. Monetary policies are typically considered to have significant influences on asset prices. As a result, a thorough understanding of how monetary policies affect asset prices, particularly asset price bubbles, is a key component of financial policymakers' agenda.
Monetary policies and asset prices conventionally work in opposite directions. An expansionary monetary policy inflates asset prices, whereas a contractionary monetary policy deflates asset prices. Such a relationship usually holds, as a contractionary monetary policy raises interest rates, and high interest rates transmitted to the financial market serve to suppressed asset prices. Despite the intuitive nature of the relationship, empirically, there exist many counterexamples, known as “price puzzles”, first identified by Sims (1992). The “price puzzle” phenomenon complicates research studying the relationship between monetary policies and asset prices because intuition is no longer sufficient to delineate the mechanisms-new theories and supporting empirical analyses are necessary to characterize how monetary policies affect asset prices.
This paper aims at deepening our understanding of the effects of monetary policies on asset prices, particularly in the context of the Chinese stock market. Theoretically, we follow the literature to decompose asset prices into fundamental and bubble components, and provide conditions under which asset price bubbles exist. In practice, asset bubbles can exist, for example, when asset prices dramatically fluctuate in a short period of time, or when the market expects asset prices to quickly move up even if current asset prices are stable. We further show that when asset price bubbles exist, a contractionary monetary policy may enlarge the bubble component of asset prices, contrary to conventional wisdom, because higher interest rates may raise the expected growth rates of the bubble component of asset prices. An implication of our theory is that asset price bubbles change over time; thus, it is necessary to characterize the dynamic effects of monetary policy on asset prices over time to gain better understandings. The Chinese capital market has undergone tremendous transformation over the past few decades; thus, it is especially important to capture the time-varying effects of monetary policy on asset prices.
Based on the theoretical framework, we use the time-varying coefficient SVAR technique to empirically test how Chinese monetary policies affect key financial variables. To conduct the empirical analysis, we collect a range of relevant variables, including the real GDP, GDP deflator, commodities price index, interbank rates, M2 growth rates, and information on all of the individual stocks listed on the Shanghai Stock Exchange in China from 1997 to 2016. We start with a constant-coefficients SVAR model as a reference and compare it with results obtained from a time-varying coefficients SVAR model. One difference between the two SVAR models is the effect of time lags. This difference suggests that our time-varying coefficient SVAR is a more appropriate model. The two models also imply different magnitudes of the effects of monetary policy. Overall, our empirical analysis suggests that when the stock market contains some bubbles and contractionary monetary policy shocks are sufficiently long, the Chinese stock market will experience price increases driven by bubbles that outpace the declines in fundamental prices. Contractionary monetary policy will thus further strengthen the bubbles.
Our theoretical framework suggests that monetary policies do not affect the conditions under which asset bubbles emerge. Instead, monetary policies influence the magnitude and the future path of asset bubbles when bubbles already exist. In addition, the usual inverse relationship between monetary policy and asset prices holds true within a certain limit. Beyond that limit, contractionary monetary policy may enlarge asset bubbles. Therefore, policymakers need to be aware of this complexity of the financial system and establish appropriate policies accordingly.
Keywords： Monetary Policy Shocks; Stock Market Bubbles; TVC-SVAR

Summary： Capital misallocation is a prevailing phenomenon in developing countries including China. The allocation efficiency of capital in China has improved in parallel with the market economy. However, capital misallocation in China still widely exists across regions, industries, and firms, particularly between state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs). The literature focusing on capital misallocation between SOEs and NSOEs raises two criticisms. First, most current studies only examine the effect of a single factor, e.g., interest rate control, SOE subsidies, or monopolistic power, on capital misallocation, thereby failing to evaluate the overall effect of policy interventions. Second, previous studies are either based on the static framework of Hsieh & Klenow (2009) or on reduced-form econometric analyses. These approaches are unable to fully characterize dynamic effects in a varying environment with firms' entry and exit.
To address these issues, this paper develops a quantifiable dynamic general equilibrium model of firm dynamics akin to Hopenhayn (1992) that accounts for interest rate control and vertical production structure, and inspects the mechanisms of capital misallocation between SOEs and NSOEs. Resulting from SOE subsidies, monopolistic pricing power, and upstream entry barriers, the vertical production structure defined in this paper is the one under which monopolistic SOEs take control at upstream industries, while NSOEs compete at downstream industries. The dynamic general equilibrium approach enables to not only inspect the interdependent mechanisms of multiple factors, but to also take firms' entry and exit decisions into account to characterize capital misallocation across firms, particularly between SOEs and NSOEs in a dynamic context.
We show that under the vertical production structure, SOE subsidies, monopolistic pricing power, and upstream entry barriers lead to sizable capital misallocation. Our quantitative results imply that upstream entry barrier is the main cause of capital misallocation. By excluding productive NSOEs from upstream industries, entry barrier strengthens the monopolistic pricing power of upstream SOEs, while it weakens the investment incentive of downstream NSOEs due to the relatively high price of intermediate products. Subsidies to the upstream SOEs with negative profits enhance the demand for capital by low productivity SOEs, thereby lowering capital allocation efficiency.
In addition, interest rate control also enhances the monopolistic pricing power of SOEs and further aggravates the effect of vertical production structure on capital misallocation. On the one hand, interest rate control stimulates SOEs with negative profit to demand more capital. On the other hand, it raises the capital demand of NSOEs at downstream industries, which increases the demand for intermediate products and strengthens the monopolistic power of upstream SOEs. Therefore, these results signify that interest rate liberalization and SOE reform can significantly improve capital allocation efficiency. Moreover, this paper quantitatively compares the ordering of the two reforms. We find that carrying out interest rate liberalization and SOE reform simultaneously is the best option.
This paper provides two main contributions. First, this paper integrates interest rate control and vertical production structure in a standard firm dynamics model, enabling to quantitatively inspect the causes and mechanisms of capital misallocation between SOEs and NSOEs. In contrast, Luo et al. (2012) do not consider vertical production structure, Li et al. (2015) do not differentiate monopolistic pricing power and upstream entry barriers. Plus, their model is static, and hence they are unable to depict firms' entry and exit. In addition, these two studies ignore the role of interest rate control. Second, this paper not only provides detailed policy suggestions to improve capital allocation efficiency between SOEs and NSOEs, but also quantify the welfare gain and loss of reform orderings in a dynamic horizon.
Keywords： Macro Economy; Vertical Production Structure; Interest Rate Control; Capital Misallocation

Summary： Tax revenue is an important tool for the government to adjust the income distribution gap, and personal income tax plays a major role in tax revenue. However, scholars generally believe that China's personal income tax has a limited regulatory role in income distribution. Therefore, Chinese scholars continue to focus on tax reforms to improve the income redistribution effect of China's personal income tax. Among these reforms, the tax exemption of personal income tax attracts the most attention. Since 2000, China has implemented three personal income tax reforms. All of them have involved the reform of payroll tax exemption. This is another major concern in academia, with several studies examining the relationship between payroll tax exemption and the redistribution effect of personal income tax from different perspectives.
However, many of the current studies evaluate the effect of previous tax exemption reforms on the personal income tax redistribution effect and fail to provide a basic theory for the relationship between tax exemption and the redistribution effect of personal income tax.
However, Liu et al. (2003) find that with a given tax rate, there is an exemption amount that minimizes the Gini coefficient. If the amount rises, the Gini coefficient will also increase. Yue et al. (2012) find that with an increase in the income deduction from wages and salaries, the overall progressivity index of personal income tax shows an inverted-U shape. These two studies are significant breakthroughs in the study of the basic theory of the effects of tax exemption and income redistribution. However, Liu et al. (2013) and Yue et al. (2012) both study one or some forms of personal income tax, but they fail to pay attention to the relationship between tax exemption and the general income redistribution effect of personal income tax. So far, no literature systematically clarifies how personal income tax regulates the income distribution of residents considering the change of income tax exemption amount. The implications for future reforms are thus limited.
This paper studies the relationship between the personal income tax exemption amount and its income redistribution effect by constructing a personal income tax simulation model, which was verified though the CHIPS data of China in 2008. The main conclusions are the following. First, with the increase of the tax exemption amount, the income tax redistribution effect of flat rate and graded progressive rate both rise and then decline in an inverted-U shape. Second, the relationship between tax exemption and the income redistribution effect cannot be considered statically. The change of residents' income level affects the income distribution function of residents. Therefore, the tax exemption amount of the maximum income redistribution effect is closely related to the average income level of residents. If the income redistribution effect is maximized by a set tax exemption, the tax exemption amount should be indexed, under which circumstances it will be adjusted with the average income level of residents.
Compared with the current literature, this paper identifies the relationship between tax exemption amount, the average effective personal income tax rate, and the progressivity and effect of income redistribution. This paper proves that regardless of flat rate or graded progressive rate, with an increase of tax exemption amount, the progressivity of personal income tax increases constantly while the average effective tax rate continues to decline, but its income redistribution effect presents an inverted-U shape that first increases and then decreases. Therefore, the conclusions of this study have a wide range of applications. This paper not only improves the theoretical system to set the tax exemption amount but also instructs the setting of tax exemption amount for China's current payroll income tax and the future comprehensive income tax based on the family as a unit.
Keywords： Tax Exemption; Income Redistribution Effect; Flat Rate; Graded Progressive Rate; Personal Income Tax

Summary： For a long time, the central government of China has maintained relatively controlled fiscal deficit and government debt. However, as China's economy enters the “New Normal”, the status quo may incur significant changes. While China continues to implement an expansionary expenditure policy, the roll-out of supply-side reform may lead to a structural reduction in tax revenues. Thus, fiscal sustainability is a growing concern for the central government and an even more important issue for local governments. Local governments in China bear the heavy tasks of promoting economic development and improving state governance, yet they do not have enough revenue capacities to finance these tasks. Therefore, the way to control the growing local government debt is an important issue that is desperately in need of a solution. To effectively control local governments' deficit and debt, simple measures such as increasing fiscal revenues or reducing fiscal expenditures would not be effective. Indeed, fiscal revenues and expenditures are interrelated and exhibit some causal relationship, to the extent that different revenue-expenditure relationship simply different approaches to curb deficit, suggesting that we need to clarify the causal relationship between local revenues and expenditures.
There are currently four well-known hypotheses about the fiscal revenue-expenditure relationship. However, they present some obvious shortcomings when applied to local governments in China. One of the reasons is that none of the current hypotheses consider a multi-layered and decentralized government setting, which is the case in China today; thus, they generally overlook the significant effect of government structure on the fiscal revenue-expenditure relationship. Under a multi-layered and decentralized regime, the fiscal revenues of a municipal government include two sources of revenue, own revenue and non-own revenue, and the two types of revenue tend to have different effects on the local government's expenditure behavior. Current hypotheses also fail to take into consideration the political promotion mechanism in China, which encourages local government officials to have a pro-GDP-growth motivation and cautiously watches over increases in their own revenues, as these revenues can raise economic costs. Moreover, there is not yet any empirical study that analyzes the municipal government's fiscal revenue-expenditure relationship in China. As the municipal government's debt risk has become a salient issue at different levels of government in China, a targeted study is of great practical significance.
This paper closes the current research gap by analyzing both theoretically and empirically the causal effects of local fiscal revenues on fiscal expenditures. Specifically, we first establish a theory of structural causal relationship between fiscal revenues and expenditures, which claims that the causal relationship between local fiscal revenues and expenditures hinges upon the source of fiscal revenues: own revenue, especially tax revenues, is more likely to have a negative effect on fiscal expenditures, while non-own revenue tends to generate a positive effect mainly due to the moral hazard and the pass-through of expenditure costs. Based on panel data for 336 municipalities in China from 2000 to 2013, we then use an instrument variable approach to test this hypothesis. Empirical results positively confirm our hypothesis and suggest that local governments do not put enough effort to support education and social security. We also find that compared with other regions, non-own revenue, especially special transfer payments, has a greater positive effect on overall fiscal expenditures within Eastern regions.
The results of these analyses improve the understanding of the causal relationship between local fiscal revenues and expenditures, especially by identifying the mechanism of transferring the local governments' expenditure costs of their own jurisdictions to other jurisdictions. They also have important policy implications to improve local governments' budgeting practices, better control their level, and maintain their fiscal sustainability.
Keywords： Local Fiscal Revenues and Expenditures; Own and Non-own Revenue; Transfer Payments; Causal Relationship

Summary： The pay gap between executives and employees has been widely discussed and has recently received great attention from regulators around the world. Although emerging literature explores the effects of the pay gap on firm behaviors and performances, few studies investigate how the intra-firm pay gap affects firm innovation. Considering the significant role of innovation in economic growth and social development, it is of great importance for academia and policy implications to evaluate how the pay gap influences innovation and to discuss its underlying mechanism.
Both management and employees participate in a firm operating process. However, they have different responsibilities in the process of innovation. Studies show that a firm's various characteristics affect managerial or employee incentives to participate in innovation activities. For instance, managers' innovation incentives are motivated by institutional ownership, venture capital, tolerance for failure, and analyst coverage. Meanwhile, employees' incentives are important for innovation.
Two competing theories are potentially related to the consequences of the pay gap. The tournament theory (Lazear and Rosen, 1981) proposes that firms motivate employees by setting up a hierarchy of compensation. Payment at a given level of the organizational hierarchy induces efforts from employees at both their own level and the next lower hierarchical level. In contrast, comparison theories are widely used in organizational research to explain individuals' reactions to pay. Individuals expect rewards to be distributed proportionally to their contribution and evaluate themselves (the equity of their exchange relationships with their firms) in comparison with reference groups. If their input-outcome ratios are lower than those of the reference groups, the feelings of inequity or deprivation will be stronger.
By constructing the variable of the pay gap between management groups and employees, this paper combines managerial and employee incentives, and investigates the effect of the compensation system on innovation in a comprehensive way. We measure firm innovation using patent applications. In the baseline tests, we construct a linear model of the pay gap and innovation, and find a positive relationship between them. To identify the causality, we introduce two instrument variables to address the possible endogeneity: the change in the after-tax pay gap caused by individual income tax rate adjustment and the provincial minimum wage. Both instrument variable regressions provide results consistent with the baseline results.
To further investigate the source of innovation incentives, we decompose the firm pay gap into three components: management pay premium, employee pay premium, and industrial pay gap. Results show that the positive effect of the firm pay gap on innovation is driven by management pay premium, that employee pay premium reduces innovation quantity, and that the negative effect is more pronounced in firms with lower human capital and in non-SOEs.
We contribute to the literature in three ways. First, we examine the effect of the intra-firm pay dispersion on innovation in a transitional economy, thus complement the emerging literature focusing on the determinants of firm innovation. Second, we explore the possible underlying mechanism of how the pay gap affects firm innovation output. The decomposition of the pay gap helps us understand the different roles of management and ordinary employees in innovation activities. Third, our conclusions have clear implications for the trade-off between justice and efficiency for both government and business sectors.
Our findings indicate that a relatively large pay gap within a firm promotes firm innovation, which is consistent with the tournament theory. However, we cannot rule out the possible negative effect suggested by comparison theories, as our evidence only reflects the “net” effect. In fact, the pay gap may play both a positive and a negative role in motivating firm innovation, but the latter is dominated by the former.
Keywords： Pay Gap; Innovation; Pay Premium

Summary： The optimized adjustment of China's manufacturing industry structure, composed by output structure optimization and element structure optimization, is not only one of the core elements of “Made in China 2025”, but also an important way to promote supply-side reform. How to further understand the upgrading of the industrial structure and the lack of rationalization in the manufacturing industry and the role they play in promoting economic development, quality, efficiency, and upgrading of the main battlefield have become major issues in academia.
In the optimization of output structure, the current literature introduces energy conservation, efficient employment, industry coordination, and other factors in optimization analysis, but it often fails to take full advantage of relevant information on open economy and the contribution of technology. At the same time, the current literature discusses the issues of output structure optimization and optimal allocation of production factors, yet the “two skins” phenomenon prevents these issues from being organically combined together.
Based on the current literature, this paper first uses non-linear programming technology from the perspective of energy-saving emission reduction, accounting for efficient employment, industry balance, import and export potential, technical level contribution, and other factors, to optimize the output structure of China's double-digit industries in 2015. Then, we use the transcendental logarithmic production function model to extract the non-linear relationship between factor inputs and economic outputs and identify the relatively appropriate element structure of the optimized output structure. Finally, based on Data Envelopment Analysis technology, capital stock is used to estimate and analyze the capacity utilization level before and after optimization.
The findings are as follows. First, the manufacturing industry structure has huge optimized adjustment potential and can reduce energy intensity and carbon dioxide intensity by 18.08% and 17.42%, respectively, compared with the 2015 values. Second, to decrease resource misallocation, the input factors of the manufacturing industry require linkage matching, especially the capital stock, which should be adjusted by a large amplitude after the output structure optimization. Third, the results of the calculation of the utilization level of capital stock further show that the utilization rate of manufacturing capacity (56.14%) in 2015 is much lower than the average level (73.27%) in the second half of the 12th Five-year Plan for the national economy (2008-2010), which is affected by the investment inertia and slowdown of economic growth, while the capacity utilization after the linkage matching of input factors can be improved to match the latter.
The main contributions of this paper are the following. First, in the optimization of the manufacturing output structure, we focus on the import and export potential indicators from the “demand side” and the technical level contribution index from the “supply side”. Second, we overcome the “two skins” phenomenon of the analyses in the current literature by organically combining output structure optimization and factor input matching. Third, in the study of element structure matching, this article follows the idea of inheritance and criticism; thus, it relies not only on the extraction of historical information to carry out the initial matching of the element structure but also analyzes the allocation of capital stock, focusing on the capital stock overcapacity problem.
Keywords： Industry Structure; Element Structure; Overcapacity; Energy-saving and Emission-reduction

Summary： The notion of happiness as the “hidden wealth of nations” has drawn increasing attention worldwide. This paper investigates whether and how the gender of children affects the happiness of Chinese parents. These questions are particularly interesting in current China, as Chinese society has both a long tradition of farming practice and patriarchal culture and has experienced substantial transformation.
In the agrarian epoch, sons brought more happiness to parents, as men are naturally more capable of home production and kinship finance. In recent decades, China's market-oriented reforms have handed over the majority of productive and financial activities to enterprises and markets, which has improved the comparative economic situation of women. Along with the fact that women are better at providing emotional support and physical care, daughters are now expected to have a more positive effect on parents' happiness. In addition, the serious gender imbalance has created intense competition for men in the marriage market, which may potentially lower the happiness of families with sons.
However, market-oriented reforms and social transformation are far from over. The relatively closed and personalized networks and the open and impersonal market mechanism both play important roles in organizing economic activities. It remains an open question whether daughters indeed bring their parents more happiness compared with sons. Using the 2008 Chinese General Social Survey (CGSS) data, the paper provides an empirical test.
The major challenge of this analysis is that the gender of children may be manipulated due to the traditional son preference and the family planning policy of China. The gender selection of children can be correlated with other factors that may influence parents' happiness and cause omitted variable bias. We alleviate this problem by exploiting the plausible exogeneity of the gender of the first-born child. Studies have shown that parents generally welcome their first-born child regardless of gender and seldom exert gender selection for their first-born child. This is especially the case in rural areas, where a second-born child is officially allowed if the first-born is a girl according to the “one-and-a-half children” policy. A robustness check using a subsample from rural areas can strengthen our results.
We find that the gender of the first-born has a non-trivial effect on parents' happiness. In general, sons are found to bring less happiness than daughters in all of the specifications—OLS regressions, ordered logistic regressions, IV estimations, and related robustness tests. But results vary with children's age. Parents' happiness is not affected when children are young or when they are in primary and middle schools (0-16 years old). However, sons are correlated with lower levels of parents' happiness when it is time to worry about career and marriage (17-30 years old). The analysis of the subsample of elderly parents exhibits a similar pattern: parents with daughters are happier than those with sons. The effect is more evident for elderly mothers (compared with fathers) or elderly urban parents (compared with rural parents).
Furthermore, our data lend no support to the idea that parents lean on sons for family care when they get old. First, in terms of living arrangements, parents are equally likely to live with sons as with daughters. Second, in terms of financial support, for parents who are covered by social security programs, sons bring significantly less happiness than daughters. However, for parents without social security, the effect is smaller in magnitude and becomes statistically insignificant. These results suggest that the traditional idea of the “nurture-in-exchange-for-support effect” has already faded in today's Chinese families. Instead, there exists a “nurture-up-to-housing-support effect” in urban areas: an increase in housing prices reduces more severely the happiness of parents with sons. This result is consistent with the hypothesis that urban parents with sons bear the pressure of their sons in the marriage market competition and worry more about higher housing prices.
Keywords： Children's Gender; Parents' Happiness

Summary： Under the research framework of individual selection, current studies of altruistic behaviors clearly explain hard-core altruistic behaviors between kin individuals and soft-core altruistic behaviors between non-kin individuals based on kin-selection theory and reciprocity theory. However, hard-core altruistic behaviors between non-kin individuals remain unexplained. Although group selection theory helps to a certain extent, its premises are constantly challenged. This paper tries to explain pure altruistic behaviors from an individual selection approach.
Moreover, from an institutional economics perspective, current research tends to attribute altruism to the rule of punishments and rewards, while failing to give a reasonable explanation without external incentives. This study argues that some altruistic behavior can be explained by the internalization of norms, which is a natural consequence of bounded rationality. This research thus provides an evolutionary foundation for the internalization of norms from the perspective of bounded rationality.
The main point of the theory is that the severe limitations of information processing have pushed humans to rely on institutions to deal with the complexity of social interactions. As a result, individuals behave according to internalized norms rather than external incentives. Internalized norms are manifested mainly through prosocial emotions, such as shame and guilt, which offer a solution to relieve bounded rational individuals from the burden of information. Thus, the loss of fitness in hard-core altruism can be seen as a kind of “trade” to survive the complexity of social networks with a very limited capacity for information processing.
The paper tries to answer the appeal in Frank (1988). Frank complains that the individual selection frame and rational choice theory describe our world as one filled with complete opportunism with no room for the evolution of morality. This paper tries to provide a possible explanation for the hard-core altruism of individual selection frame. By using the smoke detector principle from evolutionary psychology, this paper illustrates how the internalization of norms turns into a cognitive bias. To distinguish altruistic behaviors motivated by complete opportunism and those driven by internalized norms, this paper gives a formal analysis using the Replicator Dynamic Model. The analysis implies that the higher the cost of rational calculations compared with the limited capacity for information processing, the higher the possibility of the internalization of norms.
In addition, this paper simulates the evolution of altruistic behaviors driven by the internalization of norms by agent-based modeling with Netlogo. Instead of a simple dichotomy in the preceding replicator dynamic model, which categorizes individuals into either pure altruism or complete opportunism, the simulation sets a threshold for each agent that indicates the extent to which the agent tends to internalize prosocial norms and save the cost of rational calculations. The evolution of the distribution of the threshold depicts the evolution of altruism in the population. The result confirms the result of previous analyses.
The analysis in this paper suggests that the internalization of norms and emotional socialization are significant foundations of human cooperation. Hard-core altruistic behaviors between non-kin individuals are not only special cases but generally apply to cooperation in human society. This article argues that efforts to improve social cooperation should not be limited to external incentives or to increasing supervision, but should pay more attention to emotional socialization, especially to the cultivation of prosocial culture in the family and school.
The result of the analysis supports the explanation of altruistic behaviors by Herbert Simon. Altruism is a result of the bounded rationality of humans. It is a natural consequence resulting from the internalization of norms. Although altruistic behavior itself reduces individuals' fitness, the mechanism behind it actually increases individuals' fitness.
Keywords： Bounded Rationality; Internalization of Norms; Altruism; The Smoke Detector Principle; Agent-based Modeling