Fiscal Hierarchical Reform, Intergovernmental Financial Decentralization and Regional Government Financing Disparity: Evidence from Debt of Local Government Financing Vehicles

Abstract

Intergovernmental fiscal and finance relations have a deep impact on characteristics of China's economy and the behavior of local government at all levels. This paper wants to figure out the basic logic for the allocation of financial resources among regions under the implicit financial decentralization. Based on local government financing vehicles' (LGFV) debt data and by exploiting “ Province Managing County” (PMC) reform as a policy shock to construct a DID framework, this study find that city governments with better economic and fiscal status can gain more funds through bank loans and municipal bonds when facing PMC reform, whereas the less developed ones are less capable to utilize the new opportunity, thus widening the regional gap of local government financing. Mechanism analysis implicates that city's economic and fiscal status are the deciding force of the above procedure. However, the catching-up pressures and developing incentives of less developed regions can't be realized in reality. This study argue that this might be an explanation for the expansion of regional disparity along with the reform of China's central-local relationship.