Soft Budget Constraint, Risk Incentives of Debt Financing and Growth Threshold Effect
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| Title | Soft Budget Constraint, Risk Incentives of Debt Financing and Growth Threshold Effect
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| Author | Guo Yuqing, Sun Xifang and He Yang |
| Organization | Nankai University; Seoul National University;Central University of Finance and Economics |
| Email | guoyq@nankai.edu.cn；xifang@snu.ac.kr；hy1012@gmail.com |
| Key Words | Soft Budget Constraint; Local Government Debt Financing; Risk Preference; Growth Threshold |
| Abstract | How to quantitatively control hidden risks of local government debt financing? This paper empirically analyzes the risk incentives and growth performances of China’s local government debt financing by SAR Tobit and Dynamic Threshold Models. Using different model setting, several proxy and control variable combinations, we test the robustness of empirical results. Our results show that inspired by intertemporal and cross region soft budget constraint of vertical imbalance decentralization, local government debt financing forms an interaction mode of risk preference. Solvency risks are mainly hidden in undeveloped provinces with weak tax bases. Distinguished by debt service ratio of 186.45%, local debt financing obtains quite different growth performances. Excessive borrowing has reached the critical point of performance conversion. Trying to pass the buck through common pool effect of discretionary transfer and maturity mismatch between local official’s tenure and debt repayment, most high risk provinces have stepped across dynamic growth threshold. The empirical results provide quantitative evidences of budget supervision and limit control for local government to issue bond. |
| Serial Number | WP873 |
| Time | 2015-05-19 |
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