Summary： China has an industrial tax system in which firms are the main taxpayers and the added value of taxable products is the main tax base. It is most typical in the manufacturing sector, which has the highest tax rate and the strongest performance in the whole economy after the value-added tax is extended to the service sector. Industrial taxes include the value-added tax, consumption tax, business tax and the urban maintenance and construction tax, which is levied based on a fixed rate of the value-added tax. These taxes accounted for 51% of China's total tax revenue in 2016. The urbanization rate in China exceeded 50% in 2011, and the manufacturing industrial proportion continues to decline. Industrial Tax growth has stagnated following this rapid decline, resulting in a decrease in the growth of tax revenue from 25% in 2011 to 4.8% in 2016. Meanwhile, the urbanization process has increased demand for public services. The long-lasting and ever-expanding fiscal gap brought about by the sustained rise in demand for public services and the slowing growth of industrial tax revenues can be solved by land sales in the short term, but three long-term challenges/contradictions arise: (1) the contradiction between the declining proportion of industrial tax and increasing demand for public services brought by urbanization, (2) the contradiction between the continued rise of the urbanization rate and the unsustainable growth of land finance, and (3) the contradiction between the imbalance of local fiscal revenue caused by urban differentiation and equal access to basic public services nationwide, which sharpens the asymmetry between regional financial risks and the overall arrangement across the country.
Under the development path of bilateral tax incentives (i.e. by boosting industrialization through industrial tax and boosting urbanization via land finance), the growth of the two forms of government revenues, namely tax and land rent, due to the different development trends of industrialization and urbanization and local governments' focus on land management, displays a pattern of “rent substituting tax”. In this study, we find that (1) the increase in the urbanization rate is almost synchronous with the increase in the land price. Generally, if the urbanization rate increases by 1%, the land price will increase by 6% accordingly, and (2) the promotion of urbanization, or the rise in the price of land, significantly inhibited the proportion of industrial tax. Specifically, if the land price doubles, the proportion of industrial tax in the local government tax revenue will decline by 0.87%, and the proportion of industrial tax in the local government expenditure will fall by 1.44%. Furthermore, (3) the development of land and population urbanization will not increase the tax income under the current industrial tax system.
We make three propositions based on international comparison and historical experiences. Further, based on our research, we make the following policy recommendations: (1) Matching the personal tax to public service enjoyment. To this end, citizens' demands for public service in the pursuit of a better life can meet the principle of “Do as you can”. (2) Taxing consumption and reducing fiscal stimulus distortions caused by overconcentration on the production of the indirect tax system. (3) Holding 30% as the bottom line of the industrial proportion, as this is equally important for the robust functioning of the public sector and the “construction of industrial powers” target in 2050. (4) Establishing a national unified land market, strictly controlling the land bubble and curbing speculation on land by local governments. (5) Transforming income distribution from “resource rent” to “knowledge rent” and preventing the formation of a wealth trap.
Keywords： Industrial Tax; Urban Economy; Industrialization; Urbanization; Rent Tax substitution

Summary： In the four years after the financial crisis, from 2008 to 2011, China kept its GDP growth rates above 9%, rose to become the world's second largest economy, and joined the club of upper-middle income countries. So, what made China an outlier in the post-crisis period？
The behavior of Chinese local governments has become increasingly notable. First, we observe strong positive co-movements between infrastructure investment and residential land prices. In 1994, tax reform caused the centralization of tax revenue and the decentralization of authority. Afterward, Chinese local governments started to undertake greater burdens of local economic development and urbanization. As a main part of the task, infrastructure investment has become an increasing obligation for local governments. At the same time, the centralization of tax revenue reduced budgetary fiscal revenue significantly but left land-related revenues to local governments as non-budgetary fiscal revenue. After the housing commercialization reform in 1998, and a primary development of urbanization, the value of urban land has been largely revalued, leading local governments to rely more and more on the land-transferring fees to finance their public expenditure, especially the infrastructure investment. This behavior is general referred as “land finance”, and has been more notable since the central government's monetary and fiscal stimuli in response to the subprime crisis.
Chinese data reveals more about land finance behavior. First, there is a substantial difference between residential land prices and industrial land prices. Industrial land prices have been much lower and less volatile. Second, local governments' tax revenue from firms is negatively correlated with residential land price and infrastructure investment, which is a countercyclical phenomenon of local taxation. We believe land finance is an important factor in China's high-speed growth in the post-crisis period. However, quantitative studies on this topic in a general equilibrium framework have been scant.
To understand and replicate the salient features of land finance, we build a DSGE model by introducing local governments' behaviors into Liu et al.'s (2013) model. Unlike the literature treating governments' behaviors as exogenous shocks and that treating governments as competitive sectors holding partial knowledge, our model treats the local government as the leader in a Stackelberg equilibrium. The government solves the Ramsey problem by choosing the optimal levels of the tax rate, infrastructure investment, and land supply in two land markets. To give the government an incentive to provide infrastructure investment, we assume that infrastructure investment has positive externalities to private production and that infrastructure investment enters the government's objective function. Because Chinese local governments have strong monopoly power in the elementary land market, we also assume that the land market is separate for households and firms, so there are differentiated residential and industrial land prices in our model.
The mechanism of our model is as follows. When a positive shock to housing demand occurs, the local government adjusts residential land supply and raises the residential land price to relax the budget constraint, which increases infrastructure investment and decreases the tax rate. The local government also suppresses the increase in the industrial land price to guarantee the promotion of private production. Because of the complementarity between the factors in production, the marginal products of private investment and labor employment rise, and demand for private investment and labor employment thus increases. Furthermore, because the total land supply is exogenously limited, local governments' attempts to control the rise of the industrial land price tightens the supply of residential land. In addition, the rise in wage causes a wealth effect that further increases the demand for residential land. Thus, a financial spiral is set off that drives the fluctuations in major macroeconomic variables as described following the initial shock to housing demand.
Keywords： Land Finance; Infrastructure Investment; Differentiated Land Prices; Macroeconomic Fluctuations

Summary： Identifying the sources of productivity growth of a country has always been the focus of economic research. In 1992, for the first time, China put forward the establishment of a socialist market economic system with Chinese characteristics in its 14th National Congress of the Communist Party of China (CPC). Five years later, detailed plans for economic system reform and strategies for economic development were released in the 15th National Congress of the CPC. Afterward, China began to experience rapid growth in per-capita income and total factor productivity (TFP) that lasted more than 10 years. The remarkable performance of China's economy since the late 1990s has aroused great interest from economic researchers in identifying the sources of its productivity growth.
Drawing on a large firm-level dataset for the Chinese manufacturing industry spanning the period of 1998—2007, this paper aims to link the aforementioned productivity growth to the well-known reform of Chinese state-owned enterprises (SOEs) beginning in the late 1990s. The theme of this reform policy is “Grasp the Big, Let Go the Small”—that is, focus on the big SOEs and give up the small ones. During this process, huge amounts of production factors flowed from the state sector to the non-state sector. Production factors also flowed within the state sector under the guidance of the government. After the reform, the number of SOEs decreased dramatically, accounting for only 15% of the total number of industrial firms in China. Song et al. (2011) points out that China's SOEs are less productive than its non-SOEs, although they are favored in the factor market. SOE reform facilitates capital and labor inflow into a more productive non-state sector and improves the resource allocation efficiency of the whole manufacturing industry.
To consistently estimate production function and obtain the firm-level TFP, we follow Levinsohn & Petrin (2003) to use an intermediate input as a proxy for the unobserved productivity shock and to control for firm entry, exit and ownership in the production function estimation. The nonparametric method of ACF (Ackerberg et al., 2015) is used in our Cobb-Douglas production function estimation to further address potential endogeneity issues.
To quantify the effect of SOE reform on TFP growth, we divide all Chinese manufacturing into two sectors, the state sector and non-state sector, and then decompose the aggregate TFP growth of Chinese manufacturing during 1998—2007 into a within-sector term (plant improvement) and a between-sector term (reallocation) in the static analysis, and a within-sector term and three between-sector terms (including entry and exit) in the dynamic analysis.
Our empirical results show that the SOE reform in the late 1990s played a significant role in driving economic and TFP growth. The “Grasp the Big” policy caused substantial intra-sector factors to flow within the state sector, inducing extra productivity gains of SOEs in Chinese manufacturing industries except for their endogenous growth, while the “Let go the small” policy caused huge between-sector factors to flow mainly from state sector to non-state sector, resulting in considerable TFP growth of non-SOEs, therefore, substantial productivity growth of the whole Chinese manufacturing industry. The latter contributes about one fourth of the TFP growth of China's manufacturing industry. To sum up, the huge amounts of intra-sector and between-sector factor flow caused by the “Grasp the Big” and “Let Go the Small” policies of China' SOE reform can well account for the post-reform TFP growth of the Chinese manufacturing industry.
This paper sheds light on the debates on the reasons for China's remarkable economic achievement since the late 1990s. Our research is also supportive of China's current supply-side market reform: under overcapacity, the government should restructure SOEs in strategic industries and gradually remove outdated production capacity to improve allocation efficiency, which will eventually enhance the productivity of the whole economy.
Keywords： Factor Flow; TFP Growth; SOEs Reform; Supply-side Reform

Summary： Technological progress is critical to the sustained growth of a country or region's economy. How to promote technological progress better and faster is an important topic that people pay close attention to. Technological progress is driven mainly by two means: independent innovation and technology import. One of the main signs of a latecomer country transformed into a developed country may be that the pattern of technological progress has transformed from technology import to independent innovation. Thus, the Chinese government has emphasized realizing the change in technological innovation ability from “tracking” to “parallel” and “leading” in its science and technology development strategy in recent years.
On the basis of theoretical analysis, this paper extends the idea of Aghion et al. and studies the impact of economic volatility on the technological progress mode and how financial development affects this impact by empirical analysis based on data for large and medium-sized industrial enterprises in China during 2005—2010 and data for industrial enterprises above a designated size in China during 2011—2014. We find that economic volatility affects the mode of technological progress by two mechanisms: the opportunity cost effect and the expected return effect. Different types of economic volatility and different durations of economic fluctuations will generate different impacts. Financial development affects the relationship between economic volatility and the mode of technological progress by affecting the expected return effect. If the technology gap is different, the effect of financial development will be different. This paper also finds that the turning point of the technological progress mode appeared around 2010. The influence of financial development on the relationship between economic volatility and technological progress mode varies by time and region. This paper argues that we can realize the successful transformation of the technological progress mode with the help of continued downward economic growth, increased economic volatility, and more financial resources to support independent innovation.
Based on our findings, we offer some meaningful policy suggestions. In the current situation, we can promote the transformation of the technological progress model with the help of this round of downward economic growth. We should also accelerate the reform of the financial system, pay attention to the cultivation of the financial system, provide more financial support for independent innovative enterprises, and create conditions for the successful transformation of the mode of technological progress. We should adapt measures to local conditions when we implement innovation-driven strategy and encourage independent innovation. The technical level of each region is different, and there are differences in the technology gap, so we should give full play to the effects of financial development and economic fluctuation on the transformation of technology progress mode in regions or industries in which the level of technology is higher, and we should also pay attention to the introduction of technology means to promote technological progress in regions or industries in which the level of technology is lower. Breaking administrative monopolies and fully stimulating motivation for independent innovation should also be considered. The monopoly status of state-owned enterprises will lead to their unwillingness to innovate.
The contribution of this paper is twofold. First, this paper constructs a theoretical model based on Aghion et al. to analyze the influence mechanism of economic fluctuations on the technology progress mode and provide ideas for realizing the transformation of the technology progress mode successfully given China's current economic situation. Second, this paper builds an animal spirit index based on entrepreneur confidence data and then identifies the opportunity cost effect of economic fluctuation on the technology progress model.
Keywords： Economic Volatility; Technology Import; Independent Innovation; Financial Development

Summary： Domestic market segmentation and high-speed economic growth are two main features of China's transitional economy. Prior research largely attributes them to the institutional behavior of Chinese governments, the foundations of which are fiscal decentralization and promotion tournament since the “reform and opening-up”. These institutions have created considerable incentives for local government cadres to develop the economies in their jurisdictions and have also caused intense inter-regional tax and economic competition, leading to local protectionism and market segmentation. However, government behavior can also be influenced by the individual preferences of officials. Politicians tend to choose policies in favor of their preferred regions, which is called regional favoritism. In this paper, we focus on the impact of non-institutional factors on market integration from the perspective of local officials' regional favoritism.
Local officials move so frequently under the rotation system for party and state leading officials in China that relationships can be well established between local officials' jurisdictions and their connected regions. This offers us an excellent opportunity to examine market integration given local officials' regional favoritism. We measure market integration using the differences in regional relative commodity prices and regional favoritism based on local officials' personal information. Based on paired data at the province level from 2002 to 2015, we find: (1) local officials' regional favoritism has a significant effect on market integration. Specifically, the tendency of officials to adopt market segmentation strategies for connected regions is 7 percent lower than for non-connected regions. The effect is robust to a battery of sensitivity analyses. (2) This effect is more conspicuous when regional favoritism is through the official's birthplace, alma mater or the countryside where they stayed during the Down to the Countryside Movement, while the effect is not obvious when the regional ties are built through the ex-workplaces of the officials. (3) The effect appears immediately when the connected officials take office, disappears around the fifth year when the officials are assessed by the central government, and emerges again after the assessment period, and this effect is stronger in jurisdictions of officials with higher market segmentation motives and in connected regions of officials with stronger favoritism motives. We also find that the effect exists in the market integration of tradable goods but not non-tradable goods.
This paper contributes to several strands of the literature. First, our paper offers a novel research angle on market integration. Prior research analyzes market integration from the perspectives of fiscal decentralization and political promotion tournament, but we find that officials' regional favoritism, a less examined non-institutional factor, also affects market integration. Second, this paper contributes to the literature on regional favoritism. Most research views regional favoritism as a form of rent seeking and possible corruption. However, we demonstrate that officials' regional favoritism plays a positive role in integrating China's inter-regional markets. Finally, this paper enriches the literature on the economic consequences of officials' geographical rotation. Prior literature documents the effects of Chinese officials' geographical rotation system on anti-corruption, mitigating information asymmetry between central and local governments and promoting economic growth and capital flow. We add to the literature by showing that officials' regional favoritism contributes to the integration of inter-regional markets under the rotation system.
The findings of this paper have reference value for properly evaluating and understanding favoritism effects under the political system with China's unique characteristics. The policy implications indicate that officials' geographical rotation could be a feasible way to integrate markets with a lower cost than other policy instruments.
Keywords： Regional Favoritism; Connected Regions; Market Integration

Summary： Policy interest rates in several advanced economies have stuck at around or below zero since the onset of the 2008 financial crisis. Although the global economy has been on a recovery track, there are still trillions of dollars worth of bonds with negative yields. As global growth picks up, this issue will not go away. A great deal of research suggests that global productivity will stay low in the long term, and hence neutral interest rates consistent with long-term growth will stay significantly lower than their historical levels. Therefore, an adverse shock can easily bring advanced economies back to a zero lower bound.
Although a negative interest rate is not unorthodox in economic theory, there have been heated debates over it since the negative interest rate policy （NIRP） was first introduced in a major economy. The NIRP is widely believed to squeeze banks' interest margins and cause banks' profitability to deteriorate. More importantly, holding cash (paper currency) is an alternative to deposits in a bank account. While institutions holding large deposits are unlikely to convert deposits into cash, retail depositors like households may easily withdraw from banks and hold cash instead. Therefore, banks are reluctant to expose retail depositors to negative interest rates. While returns on bank assets have declined considerably and deposit rates remain sticky, banks' net interest margins have tended to shrink.
While these concerns about the NIRP seem plausible, they misunderstand how the banking system works. As Sun Guofeng (1996, 2001, 2015) has pointed out, bank deposits are created by asset purchases, mainly by bank loans (LCD), not the other way around. When a bank initiates a loan, it simultaneously creates a matching deposit in the borrower's bank account, thereby creating new deposits. In a practical sense, banks do not use deposits to make loans, and banks' credit supply is not constrained by the deposits initially made by households. Although an individual bank can lose deposits to other banks, deposits as a whole remain in the banking system: only cash can be withdrawn and leaves the banking system. However, the cost of holding cash is very high, and the security cost of holding a large amount of cash is extraordinarily high. Central banks can always provide sufficient liquidity to make up for cash withdrawn. In addition, digital currency issued by central banks is bound to become a trend. Central banks can easily set negative interest rates on central bank digital currency. The importance of paper money in the transmission mechanism of monetary policy will significantly decrease.
In this paper, we use a micro-founded DSGE model incorporating the key features of a banking sector to investigate the transmission mechanism of the NIRP. We model the financial contract explicitly to capture the cyclical adjustments of capital investment and credit demand and to study the effect of sticky deposit rates on banks' profitability and the implications for credit supply. Simulation results show that the effects of the NIRP hinge on the downward stickiness of the deposit rates. With the deposit rates stuck at zero, banks' net interest margins are squeezed, which causes the bank capital and credit supply to decline. The zero lower bound on deposit rates has heavily impeded the transmission mechanism of the NIRP, which may account for the limited effect of the NIRP in the Euro Area and Japan. Breaking the zero lower bound on deposit rates can guarantee banks' net interest margin and reduce the fluctuations of both nominal and real interest rates.
We draw the following policy implications from the results. First, in a banking system where interest rate pass-through is complete, central banks should cut the policy rates to be substantially negative to counter a deflationary recession. Second, from a longer-term perspective, given the low natural interest rate, monetary authorities may resort to the NIRP much more often in the future. Third, phasing out cash will facilitate the implementation of NIRP. Central banks should speed up the development of central bank digital currency.
Keywords： Negative Interest Rate Policy; Sticky Deposit Rates; Transmission Mechanism of Monetary Policy

Summary： Most of emerging markets suffered exchange rate slumping and currency crisis just after their declaration of more floating exchange rate arrangements. For emerging markets and developing countries such as China, deepening the reform of the exchange rate regime requires the prevention of currency crises.
From the perspective of microstructure theory for the foreign exchange market, we theoretically analyze the influence of exchange rate regime declarations and the credibility of exchange rate policies on the occurrence of currency crises. Following Drazen & Masson (1994), Alesina & Wagner (2006), using the exchange rate regime classification data of Reinhart & Rogoff (2004) and Ilzetzki et al.(2011), we develop a database of exchange rate policy credibility including 153 countries. The credibility of exchange rate policy is calculated by the difference between the officially declared exchange rate regimes and the actual regimes—that is, the difference between de jure regimes and de facto ones. Based on the data for emerging markets and developing countries from 1970 to 2010, we also empirically analyze the influence of the announcement of a particular exchange rate regime and the credibility of exchange rate policies on the occurrence of currency crises.
Our results suggest that for emerging markets and developing countries, the more floating exchange rate regimes the government announces, which means greater tolerance of exchange rate volatility, the more likely a currency crisis is to occur. This is because under the joint action of fundamental and technical analysis traders, greater exchange rate flexibility will be likely to cause the formation of the exchange rate depreciation trend, and the trend-following strategy of the exchange rate traders will enlarge the speculative impact, resulting in a vicious cycle of increased downward pressure of depreciation and speculation and easily triggering a self-actualized currency crisis. In addition, if a country's exchange rate policies lack credibility, it will easily trigger speculative attack from international speculative capital, which will increase the chance of a currency crisis, while if a country's exchange rate policy is credible, it will reduce the chance of a currency crisis.
Our research has significant policy implications. First, for emerging markets and developing countries, when the government authority is setting and announcing exchange rate policies, greater exchange rate flexibility does not mean better, as excessive tolerance of exchange rate fluctuations will make speculative attacks on the exchange rate profitable, which will increase the risk of a currency crisis. Second, even under the floating exchange rate regime, appropriate foreign exchange intervention and correct expectations are conducive to exchange rate stability and thus necessary. Third, it is crucial that the government authorities' exchange rate policies are credible when dealing with international speculative attacks, to make the public and the market confident that the authorities' policy to maintain exchange rate stability is credible. This will help to eliminate market panic, reduce speculative attack and guard against a currency crisis.
Our research has enriched the literature on currency crises and exchange rate regime reforms across the following aspects. First, we apply the latest microstructure theory for the foreign exchange market to analyze speculative attacks in exchange markets and the occurrence of currency crises to enrich and develop the currency crisis theory from the micro foundation aspect. Second, we further explain why many countries have a “fear of floating”, empirically supporting the theoretical results of Calvo & Reinhart (2002). Third, our research on the credibility of exchange rate policies' impact on the occurrence of currency crises not only enriches and expands the field of macroeconomic policy credibility and its effectiveness but also provides further empirical evidence supporting the theoretical results on currency crises in Drazen & Masson's (1994) and Obstfeld's (1996) research.
Keywords： Credibility of Policies; Exchange Rate Regime; Currency Crisis

Summary： As of October 2015, China does not limit the deposit interest rate of banks. To prevent increasing bank risk in interest rate liberalization, an explicit deposit insurance system was introduced to cover all depository financial institutions in China on May 1, 2015. Although this deposit insurance helps to protect the interests of depositors and reduce bank runs caused by risk contagion, it also tends to induce moral hazard problems and leads to increased bank idiosyncratic risk.
Deposit insurance was first implemented in the United States. Some core elements of China's deposit insurance scheme are based on America's success, such as risk-adjusted premiums and risk-minimizing system mandates. From the perspective of preventing the moral hazard of explicit deposit insurance in the non-crisis period, this paper compares the impact of deposit insurance on bank idiosyncratic risk in China and the United States and discusses the effect of bank leverage and bank governance structure on their relationship using panel data for the Chinese and American banking industries during 2010—2015 and the method of systemic GMM. Further, we use a difference-in-differences (DID) model to explore the effect of deposit insurance on bank idiosyncratic risk and its mechanism in China.
The main findings are as follows. First, explicit deposit insurance significantly increases the individual risk of non-state-owned banks in China, while it has little effect on bank risk in America. Second, the higher bank leverage is and the higher the share of the largest shareholder is, the more serious the moral hazard problem of deposit insurance will be, both in China and in America. More dispersed ownership structure and lower bank leverage offset some of the negative impact of America's deposit insurance on bank individual risk. Third, following the introduction of China's deposit insurance, the individual risk, bank leverage and shadow banking of the four biggest banks are not significantly affected, while non-state-owned banks will raise bank leverage and engage in shadow banking more actively, resulting in higher bank risk.
Our study explores the relation between deposit insurance and bank idiosyncratic risk and the possible underlying channels, which is helpful for preventing the moral hazard of deposit insurance. First, deposit insurance will lead to the more aggressive development of shadow banking in non-state-owned banks, so financial supervisory authorities should pay close attention to other banks' shadow banking. Moreover, the same deposit insurance has different effects on bank idiosyncratic risk depending on bank leverage. The higher the bank leverage is, the more serious the moral hazard of the deposit insurance is. Regulatory authorities should encourage banks to reduce bank leverage, which will lead to more effective deposit insurance. Finally, a higher share of the largest shareholder will result in a more serious moral hazard problem regarding deposit insurance. Attention should be given to strengthening mixed-ownership reform in the banking industry and improving banks' ownership structure to lower the moral hazard of deposit insurance.
This study contributes to the literature in several ways. First, this paper directly investigates the impact of deposit insurance on bank idiosyncratic risk in China, making use of the 2015 implementation of China's deposit insurance system. Second, some core elements of China's deposit insurance scheme are based on America's success, such as risk-adjusted premiums and risk-minimizing system mandates. This paper compares the impacts of deposit insurance on bank idiosyncratic risk in the two countries. Further, based on the novel perspective of bank governance and bank leverage, we examine the institutional factors leading to differentiated relationships between deposit insurance and bank idiosyncratic risk in the two countries. Third, because deposit insurance has different effects on the four biggest banks and other banks, we use a difference-in-differences (DID) model to study the effect of deposit insurance on other banks' idiosyncratic risk and explore the possible underlying channels.
Keywords： Deposit Insurance; Bank Idiosyncratic Risk; Bank Corporate Governance; Bank Leverage

Summary： Divide-and-rule is a strategy of gaining and maintaining power by breaking up larger concentrations of power into pieces, or by preventing smaller power groups from linking up. In the redistribution of a socioeconomic surplus, a leader of a society or an organization, using the divide-and-rule strategy, can exercise his control in redistributing the surplus to maximize his payoff. In this paper, we address the following four questions: 1) How is the strategy of divide-and-rule implemented by a leader with the redistribution power to maximize his payoff？ 2) How does the change in the number of ruled groups affect the implementation of the strategy of divide-and-rule？ 3) How does a Minimal Winning Coalition (MWC) emerge under the strategy of divide-and-rule, and what is its underlying mechanism？ 4) What is the impact of the divide-and-rule strategy and the formation of the MWC on the redistribution of socioeconomic surplus？
In the process of a political competition or surplus allocation, an MWC can emerge when the divide-and-rule strategy is implemented by a dominant party to affect surplus redistribution. Riker (1962) suggests that in the process of political competition, the optimal strategy for a participant is to form a coalition that is as large as necessary to win but not larger. The model of legislative bargaining in Baron & Ferejohn (1989) predicts that to maximize personal payoff, the proposer will propose an MWC, and those players included in the MWC will benefit from the proposal, while the rest will receive a payoff of zero. Acemoglu et al. (2004) and Miquel (2007) introduce theoretical models to explain how the strategy of divide-and-rule is implemented by a leader to maintain his power and maximize his personal interest in a weakly institutionalized society with two ruled groups.
This paper develops a more general model of divide-and-rule to explain how, in a society with any number of ruled groups, this strategy implemented by the leader with redistribution power can maximize his personal payoff and maintain his power along the equilibrium path. Our model provides a relatively more comprehensive explanation for the mechanism and the rationale underlying the strategy of divide-and-rule. Moreover, we show how the MWC can emerge under such a strategy. Our work contributes to the theoretical study on the strategy of divide-and-rule and the formation of MWC. Furthermore, our model predicts that socioeconomic inequality can result from the divide-and-rule strategy, which provides a new perspective on the study of the origins of socioeconomic inequality.
The following are the main analytical results of our model. First, differentiated tax policies on the ruled groups are not necessarily the result of unequal endowments in a society. In the presence of divide-and-rule, groups with the same amount of endowment may face completely different redistribution policies.
Second, when there are only two ruled groups, it is a strictly dominated strategy for a leader to provide a transfer to either of them; therefore, the leader will never form an MWC. The MWC will emerge under the strategy of divide-and-rule if and only if there are three or more ruled groups.
Third, when there are three or more ruled groups, the leader can divide them into three different categories: privileged groups, middle groups and marginalized groups. The leader forms an MWC with some groups by providing some transfer to them, turning them into privileged groups. At the same time, he seizes a proportion of the endowment from the middle groups and deprives the marginalized groups of all of their endowment. Consequently, socioeconomic inequalities and institutional stratification of social groups may result.
Fourth, given the implicit assumption that each group has the same voting power in removing the leader, a leader is more inclined to form a MWC with low endowment groups.
Lastly, when the ruled groups become more patient, there will be a stronger constraint on the leader's redistribution power, increasing the payoff to some groups and reducing the total surplus seized by the leader.
Keywords： Divide-and-Rule; Minimal Winning Coalition; Redistribution Policy; Socioeconomic Inequality

Summary： Returns to education are closely related to a country's economic system. Before 1978, the economy in China was governed by a planning system, and education was not rewarded. Earlier studies usually find low returns to education in urban China and even negative returns in rural China. Since open reform, returns to education have risen, and returns to education in urban China are now approaching the world level. Many studies find that returns to education for rural people are much lower than those of urban people. However, their demand for education, especially higher education, is greater than that of urban people. It is puzzling that returns to education are lower while demand for education is higher for rural people. In this paper, we try to solve this puzzle.
There is a special arrangement in the Chinese household registration system (the hukou system). The hukou system divides China into two sectors, urban and rural. Rural hukou holders could not move to urban China in the past. Now, restrictions are lighter: rural hukou holders can work in cities, but they cannot enjoy the same welfare benefits as local urban hukou holders. However, there are some ways to change hukou status. Education is one of the most important channels to by which to obtain urban hukou status. Usually, when a rural child enters college, his or her hukou status will change to urban hukou. Joining the army is another way to change hukou status. With the recent rapid urbanization, land expropriation has become another important way for rural people to obtain urban hukou status. We call such people “permanent migrants”. Permanent migrants are usually not included in investigations of rural people; the remaining rural people will be the selected sample. Their education levels are lower, as is their potential income. This is why earlier studies obtained low estimates of returns to education for rural people.
In this paper, we use a unique dataset, the China Household Income Project 2013 (CHIP2013), which consists of three samples: the rural sample, the urban sample, and the migrant sample. CHIP2013 provides hukou transfer information, including whether, when, and why rural people transfer their hukou status to urban. This information can help us to identify permanent migrants so that we can include them in the rural sample to address the sample selection problems. After adjusting the rural sample, we obtain much higher returns to education for rural people than earlier estimates in the literature. In particular, we get similar magnitudes of returns to higher education for rural and urban people. This implies that education plays an equivalent role for rural people.
We first estimate the classical Mincer equation with the original sample and the adjusted sample. Rural and urban returns to education are 3.8% and 8.5%, respectively, for the original sample: urban returns are much larger than rural returns. After adding permanent migrants to the rural sample, the estimates are 5.6% and 8.6%, respectively. Because higher education enables rural people to transfer their hukou status, we estimate the returns to higher education with the same procedure. The rural and urban returns are 23.6% and 36.8%, respectively; after adjustment, the estimates are 337% and 36.1%, respectively: the gap is decreased. The omitted variable problem is a concern when identifying the causal effect of education on income. We take advantage of the fact that the data contain admission scores (of college entrance examinations) for higher education and re-estimate the Mincer equation by controlling them. The estimates are smaller, which is consistent with the ability bias story in econometrics. As only controlling scores may not be sufficient, we also use the implementation of compulsory law in 1986 as an IV to identify the causal effect of returns to education. The IV estimates provide similar results, and the rural and urban returns to higher education are 50.6% and 50.4%, respectively.
The empirical results suggest that the returns to education for rural people are not low and that the government should invest more in education in rural China, which will help smooth China's ongoing process of structural transformation.
Keywords： Hukou; Migration; Returns to Education; Sample Selection Bias; Instrumental Variable

Summary： The Long March is a miracle in Chinese history. From October 1934 to October 1936, the Chinese Red Army underwent many arduous struggles through 14 Chinese provinces and successfully opened up a bright road for Chinese revolution. This landmark historical event has given the Long March counties a kind of region-based political resource. Under the background of China's unique governance structure, can this political resource endowment exert an influence on the fiscal behavior of county-level governments on the Long March route？ We want to know if there are any differences between the characteristics of the Long March counties and their surrounding counties with similar natural conditions. If the Long March has had a lasting impact, how did it happen？
Using empirical analysis methods, this paper investigates the impacts of the Long March in the mid-1930s on Chinese counties' development and its mechanism. This paper finds that compared with the surrounding non-Long March counties, the Long March counties have higher budget expenditures and budget gaps. However, the Long March is not conducive to improving the GDP of the Long March counties, or urban and rural incomes. A Long March county has a higher probability of being an old revolutionary county or state poverty county and thus obtaining more preferential policies or fiscal support from the Chinese central government. However, a Long March county is more likely to have misuse of financial funds, more administrative expenses, and a more fiscal-supporting population. These phenomena have increased the institutional cost in Long March counties, inhibiting their economic development. For strategic reasons, the Chinese Red Army preferred to travel by back roads in the poorest regions. Therefore, we need to ensure that our conclusions about the economic effects are rooted in the Long-March event itself rather than in some other congenital geographical conditions. This paper tries to weaken the endogenous problem caused by the omitted variables through the following measures.
First, based on the principle of making the geographical conditions as similar as possible, only non-Long March counties surrounding the Long March counties are selected as the control group. We select prefecture-level cities based on the criterion of having at least one Long March county and then put all of the counties under these prefecture-level cities as the estimation sample. Second, we add as many exogenous geographic control variables as possible. Concretely, in addition to controlling the distances from the sample counties to provincial capitals and prefecture-level cities, we also control the average elevation and slope of the counties. Third, using a limited number of county-level samples and population information before the Long March, we eliminate the concern regarding unobservable omitted variables. The logic is that if there are some unobservable omitted variables that we cannot control in the regression, their impacts should also appear before the Long March happened. The corresponding regression results show that regarding the limited number of county-level samples before the Long March happened, there is no need to worry about the omitted variables problem.
The conclusion of this paper is helpful in that it objectively evaluates the performance of funds support to the revolutionary base regions in China and its policy implications. To ensure the allocation efficiency of funds support, the Chinese central government needs to strengthen the supervision of the budget expenditures of Long March counties. However, the political resource endowments of the Long March counties do not significantly promote the relative increase of GDP and residents' income. The Chinese central government may need to make efforts to increase the efficiency of the local fiscal expenditures of underdeveloped counties, ensure the effectiveness of fiscal funds allocation through various measures, and moderately restrict the proportion of administrative expenses and the fiscal-supporting population of the Long March counties. The purpose of these measures is to achieve balanced development between the Long March counties and their surrounding counties.
Keywords： The Long March; Political Resource Endowment; Economic Growth; Fiscal Supervision