How to Achieve High-Quality Economic Development under Fiscal Imbalance: An Analysis of Local Government Behaviors Motivated by the Central Government

Abstract

Abstract: This paper constructs a dynamic panel model and uses the SYS-GMM estimation method for this study. The findings show that there is an inverted“U-shaped”relationship between financial vertical imbalance and economic development quality, and that the local government investments and regulation behavior bias are the reasons for the loss of development quality caused by excessive vertical fiscal imbalance. Under the vertical imbalance of moderate finance, the central finance and political incentives have a similar marginal effect on the high-quality economic development; however, if the vertical imbalance is excessive, the inhibitory effect of political incentives on the loss of economic development quality will be stronger than that of financial incentives. The horizontal fiscal imbalance will constrain the relationship between vertical imbalance and the quality of economic development, resulting in the shrinking of the moderate threshold value of vertical imbalance in areas with higher horizontal imbalance, and the enlarging of the moderate threshold value in areas with lower horizontal imbalance. With the differences of horizontal imbalances, there is regional heterogeneity in the active function between central finance and political incentives. In areas with higher horizontal imbalance, single political incentives or political incentives combined with transfer payments can play a stronger role, while in areas with lower horizontal imbalance, the tax decentralization in the single financial incentives is better than political incentives or other strategies. Therefore, it is suggested that such measures as increasing local financial support, implementing differentiated fiscal and taxation policies, optimizing the promotion incentive indexes and so on should be adopted, so as to reduce the degree of fiscal imbalances in accordance with local conditions, reverse the behavior bias of local governments, and promote the high-quality economic development.

Key words: fiscal imbalance, local government behavior, fiscal incentives, high-quality development, political incentives

CLC Number:

F812.4

WANG Xin-liang, LIU Fei. How to Achieve High-Quality Economic Development under Fiscal Imbalance: An Analysis of Local Government Behaviors Motivated by the Central Government[J]. Contemporary Finance & Economics, 2021, 0(7): 24-37.

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