Can digital economy mitigate vertical fiscal imbalances in Chinese local government? The role of fiscal transparency

Abstract

Vertical fiscal imbalances significantly challenge local governments' ability to deliver public services and maintain financial stability. Although the digital economy has emerged as a potential solution, its influence on vertical fiscal imbalances and the moderating role of fiscal transparency remains underexplored. This study examines the relationship between the digital economy, fiscal transparency, and vertical fiscal imbalances across 287 Chinese prefecture-level cities from 2013 to 2021. Using panel data analysis techniques, the empirical results strongly suggest that the development of the digital economy can mitigate vertical fiscal imbalances, with this effect being more pronounced when higher levels of fiscal transparency are present. The heterogeneity analysis indicates that the digital economy is particularly effective in reducing fiscal imbalances in less developed regions. These findings underscore the potential of the digital economy as a tool for promoting fiscal sustainability and highlight the critical role of fiscal transparency in amplifying its mitigating effects. This study contributes valuable insights into how the digital economy and fiscal transparency can be leveraged to address vertical fiscal imbalances in local governments.