Post date: Oct 21, 2012 9:44:24 PM
"Regional decentralization and fiscal incentives: Federalism, Chinese style" by Jin, Qian, and Weingast (2005, JPE)
In the pre-reform period, 1949-1979, tax revenue goes directly to the central government, and central government allocate the tax to local government. 1980-1993 is the warm-up period for the fiscal reform. The tax remittance from local governments follow fixed contract values specified by the central government. Local government started to have some fiscal freedom in this period. From 1994, the separating tax reform promised more fiscal freedom by negotiating percentages of tax remittance between the central government and local governments. The paper tries to answer whether the fiscal reform contributes to the economic development.
This paper models the central government as a principle, and local governments as agents. The moral hazard issue in a standard principle-agent model characterizes the main friction in the economy. The economic development totally depends on agents' effort.