Tax Reform, Fiscal Decentralisation and Local Public Goods Provision in China

Abstract

Using a provincial panel data set taking advantage of the time variations brought about by the 1994 fiscal reform, this study provides empirical evidence to the hypothesis that the level of public service improves when local governments enjoy a certain degree of fiscal autonomy. China is the ideal region for this identification strategy since it has experienced various changes in the central–local fiscal relationships during its economic transition. Besides the ordinary least squares estimation, the instrumental variables approach is also applied to address the problems of measurement error in fiscal decentralisation indexes. This research lends empirical support to the literature, which argues that decentralisation improves the delivery of public services.