Fiscal Competition and Federal Shocks (new version coming soon)
Abstract: This paper studies the economic effect of federal tax rate shocks under the condition that the state fiscal policies will respond to the shocks. To implement the study, I develop a two-state dynamic model with exogenous federal tax rates, benevolent state governments, freely-mobile capital, and costly-mobile labor. I show that shocks in the federal tax rates induce vertical fiscal competition because they change the marginal effect of capital and labor on the state budget constraint. Additionally, horizontal fiscal competition has the potential of altering the magnitude of a state's responses. Quantitatively, the model implies that taking into account fiscal competition significantly influences the effect of a federal tax rate shock, in which the interaction between vertical and horizontal competition accounts 1/5 of the cumulative response of output. Moreover, the 2017 federal tax reform stimulates the short run output but decreases the long-run output, because it results in an over-response in the state corporate tax rate.
On the Non-Tax Competition Degree of Provinces: From the Perspective of Fiscal Decentralization (written in Chinese with Gong Chen, published in Finance & Trade Economics, No.4, 2014)
Abstract: This paper computes and compares the degree of provincial non-tax competition in China. Based on the numbers, we use spatial-lagged panel model to analyze the patterns of strategic interaction in non-tax competition. Our result indicates that non-tax competition exists in China with different degrees. Provinces in the eastern region compete more fiercely than those in the middle and western regions. We find "racing to the bottom" in the competition among eastern provinces, which is different from "riding on a seesaw" discovered among middle and western provinces. The importance of non-tax revenue in fiscal resources moderates the competition. Moreover, fiscal decentralization has a non-monotonic effect on the degree of inter-province non-tax competition.
On the Effect of Fiscal Decentralization on Urban-Rural Income Gap (written in Chinese with Gong Chen, published in Public Finance Research No.8, 2012)
Abstract: We develop a model to study the effect of fiscal decentralization on the income gap between urban and rural area in China. By using provincial panel data, we test the mechanisms suggested by the model. The result indicates that under the background of GDP maximizing local government, fiscal decentralization enlarges urban-rural income gap through biasing government expenditure towards urban area. However, after controlling these interactions, decentralization itself has negative effect on the gap.
The Aggregate Effect of a Regional Shock
Abstract: This paper studies how will a state-specific total factor productivity (TFP) affect the aggregate economy under the background of mobile production factors and benevolent state governments. When there is a favorable TFP shock, production factors reallocate toward the more productive state, therefore amplifies the effect of the shock. However, self-interested states will set fiscal policies in the direction that prevent factor from moving. Therefore the net effect of a regional shock depends on the relative strength of these two forces.
The Impact of Property Tax on House Prices: Incomplete Information with News Shock (with Zhuzhu Zhou)
Abstract: A news shock about the property tax expansion may decrease house prices, especially when there are bubbles in the market. However, the data shows that China's pilot property tax increases house prices instead of decreasing, which contradicts with the intuition. This paper develops a house price model in a higher-order beliefs framework and introduces heterogeneous priors to mitigate the contradiction. The result shows that if everyone believes the others are biased, then the biased aggregate belief stimulates the house prices, which agrees with the data. This paper is going to study policy implications by adding public information in the model.
A Report on Sustainable Development of Fiscal Policy During 2015-2019, Jiangbei District, Ningbo City, China, 2015.
Participant, Studies on Improving the Public Finance System (10zd&036), supported by The National Social Science Foundation of China, 2010-2014.