Fiscal Decentralization, Land Financing, and Local Public Goods Supply Structure: Evidence from 30 Provincial Capital Cities in China

Abstract

Local governments in China faced a mismatch between fiscal revenue and expenditure responsibilities after tax sharing reform in 1994. Governments are not only suppliers of public goods, but also monopolists of the primary market of land, operating land assets through land transfer, and land mortgage to increase extra budgetary fiscal revenue. Relevant research and empirical evidence found that local governments tend to break the balance of public goods supply when pursuing the growth of land revenues, and they excessively increased economic construction expenditures and weakened investment in social security and general public expenditure. However, through the empirical analysis of panel data of 30 provincial capital cities in China from 2007 to 2015, we found that these cities tend to improve the overall public service environment in the region through land financing, thus continuously improving their relative competitive advantages.