An Empirical Analysis of Fiscal Decentralization on Public Goods Spending

Abstract

China has achieved a rapid economy growth for nearly forty years since the reform and opening-up policy in 1978, and the overall living standard of Chinese residents has also improved significantly. In reality, economic transition includes a series of processes, not only related to the market and business, but also involves with the government’s change. The traditional theory of decentralization mainly argues it can make better for subordinate governments to ensure that the public goods they provided match with local residents’ preferences and to promote the efficiency of local public services delivery. This paper essentially uses a year-county dual fixed effects model to test the impact of fiscal decentralization on the spending of public goods at county-level. Our analysis finds fiscal decentralization has a significant positive impact on the spending of residents’ livelihood other than the investment in infrastructure. In particular, the county government prefers the projects closely related to public goods expenditure of local residents to the projects that have a larger spillover effect.