Decentralization and development of small cites: Evidence from county-to-city upgrading in China

This paper examines how decentralization of administrative and fiscal authority affects the development of small cities by exploiting a unique reform of county-to-city upgrading (chexiansheshi) in China. Based on a comprehensive county-level dataset and difference-in-difference approach, I evaluate the overall as well as heterogenous effect of upgrading policy between 1993 and 1997 on local economic development. The policy impacts are most pronounced in eastern regions and counties with higher initial agglomeration level. While the effect on economic development is insignificant in middle and western regions, it greatly expanded local bureaucracy size in these areas. I discuss the potential channels of policy effects under a simple decentralization framework with heterogeneous regions. These findings suggest that decentralization might generate entirely different consequences, relying on the level of local development potential. For this reason, it is important for the policy makers to fully take into account regional heterogeneity in optimizing decentralization policy.