Inter-jurisdictional Competition and Intra-city Fiscal Disparity across Chinese Cities

Local governments became the major power for public service provision with fiscal decentralization in China. Existing literature has well documented that fiscal decentralization facilitates economic growth across Chinese... [ view full abstract ]

Local governments became the major power for public service provision with fiscal decentralization in China. Existing literature has well documented that fiscal decentralization facilitates economic growth across Chinese cities. The effect of fiscal decentralization and competition among local governments on public service disparity within the cities has not been sufficiently addressed. Public choice theory argues that households with heterogeneous preferences of tax and public services would vote by their feet to choose the jurisdictions with their favorable package of public services and taxes. Therefore, disparities in public service accessibility are benign, and competition among fragmented local governments could be efficient for public service providing and generate higher satisfaction. In contrast, social stratification‐government inequality thesis argues, fragmented governance can institutionalize the hierarchical nature of residential structure by promoting and protecting unequal distribution of public resources. Since these perspectives are mainly based on experiences of “free” housing markets and unrestricted mobility of residents under western democratic systems, they do not speak directly to a transitional‐socialist economy with very unique and complicated political and household registration systems like China. Build upon the theories about the inter-jurisdictional competition for mobile capital, we hypothesize that cities with fiercer inter-jurisdictional competition are associated with higher inequality in intra-city fiscal capacity. Under this theoretical background, this study attempts to develop a theory interpret the effect of inter-jurisdictional competition on public service disparity. Using data from National Prefecture and County Finance Statistics Compendium and China Cities Statistics from 2001 to 2007, this study examines public service distribution is contingent on government structure and local government competition. Fixed-effect panel data analyses are employed in the study. The results reveal market forces, government fragmentation and competition, and other social economic factors have transformed public service provision among Chinese cities. Cities with higher level of competition among local governments are associated with higher fiscal disparity, and thus higher public service inequality within them. The findings will advance our understanding of fiscal decentralization and inter-jurisdictional competition in public service provision in fasting growing Chinese cities.