Fiscal Transfer, Education Investment and Long-Term Educational Performance

Abstract

Reasonable allocation of educational powers and expenditure responsibilities between central and local government is crucial to the development of education. The reason lies in the fact that local governments have relatively insufficient incentives to invest in education by using local fiscal revenues, while the central government, which pursues the maximization of the interests of the whole society, could promote education and other public services with spatial spilloves. The fiscal transfer payment has made up for the shortage of local investment in education. This paper uses 2010 census (micro data) and macro fiscal data to verify the effects above. Based on the year of birth and place, this paper constructs the proportion of fiscal transfers for compulsory education in the total fiscal revenue (local fiscal revenue and fiscal transfers) to reflect its structural effect. It is found that every 10% increase in the proportion of fiscal transfers brings at least additional 0.2 year of schoolings for local residents, and the effect of special transfer payments accounts for a larger share, among the three types of transfer payment. In the mechanism test, we find that transfer payment can effectively increase local education expenditure and produce an obvious structural effect. Based on this, in order to further improve the long-term educational performance of individuals, we believe that it is necessary to improve the incentive effect of the transfer payment system on common power and the division of expenditure responsibilities in the field of education.