Provincial and Local Governments in China: Fiscal Institutions and Government Behavior

This chapter examines the economic incentives available to local officials in China. The key hypothesis is that the welfare of local officials is heavily dependent on the amount of government revenue collected in their jurisdiction, minus the amount needed to provide services to local residents. The chapter is organized as follows. Section 8.1 reviews literature on the forms of oversight of local officials. Section 8.2 develops an alternative model in which the incentives faced by officials depend on the tax revenue they receive minus whatever they need to spend on local public services. Section 8.3 examines how these incentives were affected by tax law changes and market reforms. Section 8.4 considers the additional incentives faced by officials due to national government control over their possible promotion or demotion. Section 8.5 looks at the effects of policy reforms on incentives.