| Abstract | This paper explores the existence of a threshold in the relationship between local government debts and economic growth and compares the regional differences of this relationship, both theoretically and empirically. In the theoretical part, we propose a dynamic game model of three sectors, including a self-serving government. Then, numerical simulation method is applied to investigate the relationship between local government debts and economic growth in two cases—binding and loose government budget constraints. Theoretical analysis shows: When the government is not constrained by debts, there exists an inverse "U"-shaped relationship between local government debts and economic growth; When the government is subject to the debt constraints, the economic growth rate gradually decreases with the growth of local government debts. Based on the theoretical analysis, this paper uses the panel data of China's 30 provinces and cities during 1995-2010 to compare the impact of eastern and midwestern local government debts on economic growth. Here, three indexes including the explicit local government debts, the liabilities of local state-owned enterprises and bonds issued by urban investment and development corporations are respectively used as the proxy variables of local government debts. It shows: the large stock of implicit debts in eastern region adversely impinge on the economy, and explicit debts in mid-western China contribute significantly to the local economic growth. The empirical analysis of this paper coincides with the theoretical predictions. |