Do Fiscal Transfers improve the incentives of local governments to increase social spending?
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| Title | Do Fiscal Transfers improve the incentives of local governments to increase social spending?
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| Author | Li Yongyou |
| Organization | Zhejiang University Of Finance & Economics |
| Email | liyy@zufe.edu.cn,15024458016 |
| Key Words | Transfer payment; Retention rate; Benefit rate; Threshold level |
| Abstract | As an important system of fiscal decentralization, fiscal transfer is not only to compensate for local fiscal gap caused by asymmetric decentralization, and also an important incentive mechanism used by the central government to encourage local governments to take responsibility and diligence. In the face of the relative shortage of social public goods, can fiscal transfer provide effective incentives for local government to provide social public goods? Based on the empirical analysis of China's provincial panel data, this text found that both the financing mechanism and the distribution mechanism of fiscal transfer not only failed in encouraging local governments to increase social spending, but also failed in coordinating the expenditure competition among local governments. Moreover, because the financing level and benefit level of fiscal transfer both exceed the threshold value, resulting in the spending substitution phenomenon in the areas where retention rates are lower or benefit rate is higher, which can significantly reduce the incentive of local governments to increase social spending. The reason that fiscal transfer has not been able to generate effective incentives for local government to increase social spending in China, is mainly due to the way of vertical transfer and the purpose of financial needs chosen by China’s transfer payment mechanism. |
| Serial Number | WP1126 |
| Time | 2016-11-04 |
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