This research aims to explore the influences of fiscal decentralization on the imbalance between consumption and investment from theoretical and empirical perspectives. First, it analyzes how fiscal decentralization affects the ratio of consumption to investment under the framework of endogenous growth theory. Findings demonstrate that fiscal decentralization and the ratio of consumption to investment display a U-shaped relationship. Then, it empirically explores this question with a panel of 31 administrative regions in China from 1998 to 2015. Findings further show that empirical results verify the correctness of the theoretical results. Results are tested for robustness using different methods. A clear understanding of this project may help the central government in China as well as local governments to determine the reasonable rate of consumption to investment via fiscal means.
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The cost of centralization is less responsive to the preferences and needs of regions in choosing public services provided by the government (Oates 1972), which may be not conducive to the improvement of the social welfare level and then discourage household consumption. Moreover, public services are provided as the same per capita quantity to each region when regional public services are provided centrally (Lockwood 2002). Thus, judging whether public infrastructure is increased is difficult. Apparently, the relationship between centralization and the ratio of consumption to investment is uncertain.
Under political centralization context, the performance evaluation system of officials establishes the incentive structures for local governments, while economic decentralization gives local governments the necessary economic decision-making power to ensure the effectiveness of the incentive effects.
Following Wooldridge (2012), the fixed effects estimator is more efficient than the random effects estimator.
The purpose of logarithms is to reduce the volatility and heteroscedasticity of the data, and to facilitate subsequent measurement and analysis.
As discussed by Xu and Wang (2007), investment affects economic growth. Therefore, we consider the GDP per capita variable and its square term as endogenous variables.
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We express our genuine appreciation to the Natural Science Foundation of Jiangsu Province of China (Grant No. BK20190792) for supporting this study. We also would like to thank the Journal Editor and Professor Hong Sok Brian Kim for all the support provided during the editorial process.
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Liu, L. Fiscal decentralization and the imbalance between consumption and investment in China. Ann Reg Sci 66, 1–17 (2021). https://doi.org/10.1007/s00168-020-01006-1