| Abstract | This paper examines the choice of vertical relations between local governments through a dynamic game theoretical framework. Specifically, this paper explores the conditions under which it is optimal for a provincial government to adopt the system of “County Administered by Province” or “County Administered by City”. Analytical results show that when the expected payoff of a development opportunity is smaller (larger) than a critical value, the provincial government’s optimal choice is “County Administered by Province” (“County Administered by City”). Related discussions show that when the success probability of exploiting the development opportunity is smaller than a critical value, it is optimal to adopt “County Administered by Province”, and that when the considered environmental cost is larger than a critical value, the optimal choice is “County Administered by Province”, and that when the cost of social disharmony is larger than a critical value, the provincial government had better choose “County Administered by Province.” From the perspective of exploiting the development opportunity, the system of “County Administered by Province” tends to be a dominant choice relative to the system of “County Administered by City” with the development of Chinese economy. |