Local education expenditures and educational inequality in China

Abstract

We investigate the relationship between education funding and educational inequality across Chinese prefectures. The decentralisation of education in China has created substantial variations in government educational expenditures, both over time and across regions. We propose that these variations relate to the budget preferences of local governors. These are age dependent with younger officials more inclined to invest in large and quantifiable infrastructure projects rather than public service provision. This provides a source of exogenous variation in local fiscal efforts to provide public education and thus permits quasi-experimental evaluation through instrumental variable identification. Our results suggest that increased education spending is linked with lower educational inequality. Moreover, we find strong evidence of heterogeneity - the magnitude of the effect is diminishing with the degree of local fiscal autonomy.