The Bias of Local Government Expenditures, Corporate Financing Constraints and the Imbalance in Economic Structure

Wang Wenfu, Wang Dexin, Yue Chaoyun

Journal of Finance and Economics Vol. 42, Issue 10, pp. 155 - 178 (2016)  DOI:10.16538/j.cnki.jfe.2016.10.009

Abstract

Based on the structure reality problems exercising current economic growth in China from a perspective of local governments, this paper uses the provincial annual data from 1993 to 2012, draws lessons from Bernanke et al. (1999) and Fernández-Villaverde (2010) and constructs a DSGE model to make an empirical study of the internal logic relationship between the imbalance in economic structure and the increase in government investment resulting from the bias of local government expenditures. It comes to the results as follows: firstly, along with economic growth, the proportions of social investment in East China, Central China and West China constantly rise, but the proportions of household consumption and labor income show the downward trends; and the performance of the imbalance in economic structure coexists with the increase in government investment resulting from the bias of local government expenditures; secondly, a simulation comparison between big enterprise model, small and medium sized enterprise model, and sticky price model shows that the aim of economic development advanced by local governments promotes the bias of local government expenditures, leading to the increase in government investment by a big margin; owing to financing constraints, the investment of small and medium sized enterprises experiences no great increase, but the investment of large enterprises experiences a big rise, thereby intensifying the imbalance in local economic structure; and in this transmission mechanism, positive externalities of government investment, corporate financing constraints and financial friction play the important role.

Keywords

local government; bias of government expenditures; corporate financing constraint; imbalance in economic structure