| Abstract | In this paper, we take China’s Tax-sharing System as a flexible revenue-sharing contract, because the Tax-sharing System is a combination of a series of specific contracts on residual distribution among central government, local governments, and enterprises (or citizen). These specific contracts can be classified as four kinds---fixed wage contracts, fixed price contracts, decentralized contracts, and revenue-sharing contracts, which are complementary and form a flexible incentive system. Under asymmetric information the incentive system satisfies local governments’ participation and compatibility constraints, reduces their opportunism behavior, and strengthens their motivation on economic growth. But the main object targeting on fiscal revenue and economic growth will distort the direction of local governments’ effort, lead to redundant projects, extensive growth model, and furthermore lead to “tax-and-fee financial system” and “land finance”. We suggest that Chinese government should impose retail tax and adjust the division of routine power and financial power between different levels of government. |