Abstract: With a simple model of sequential games, this paper makes an analysis of the mechanisms and characteristics of the expenditure behavioral strategies between local governments under the two conditions: the closed area under administration and the free capital flow between the areas under administration. It is found throuth comparison that competition can drive the local fiscal expenditure to support heavily the infrastructure construction; this part of input will become the social overhead capital, which played an extremely important role in the development of the society and economy for some time past. But at the same time, competition can also easily cause the local governments to neglect their public service expenditures, thus lowering the overall levels of social welfare. Hence, it is necessary to guide and regulate the local governments’ fiscal expenditures to have a scientifical balance between economic development and people’s livelihood through the authority of the central government and its powerful macro-control capacity, so as to promote the sound and faster economic development.

Key words: fiscal competition; local government; fiscal expenditure structure