Abstract: By adopting the spatial panel Durbin model, this paper conducts an empirical test of the effects of China’s fiscal decentralization on the biased policy for fiscal expenditures at the provincial and lower-provincial levels. The study finds that the provincial decentralization has generally urged the local governments to increase the proportion of capital construction expenditure while decrease the proportion of social development expenditure. However, the decentralization at lower-provincial level has the opposite effects on the expenditure structure. The rise of GDP growth rate at the neighboring regions would promote the local governments to increase the proportion of capital construction expenditures and reduce the proportion of social development expenditures. During the fiscal expenditure competition, the bandwagon effect and the race-to-the-bottom effect can be found in the behaviors of the local governments. Thus, in order to correct the local governments’ biased policy of expenditures, it is necessary to push the reform of the governmental performance evaluation system and the reform of fiscal system.

Key words: fiscal decentralization; biased fiscal expenditure; three-layer power-separation framework; neighborhood competition