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7865With the completion of tax-sharing system reform in 1994, the financial capacity and governance capacity of the central government have been rapidly improved. In order to encourage the local government to actively achieve the goal of " promoting economical growth and maintaining people’s livelihood”, after 2002, the central government gradually came to allocate the transfer payment in the form of " projects” downward. The special transfer payment allocated by the project application increased rapidly from 37.5 billion yuan in 1995 to 1894.1 billion yuan in 2014, with an average annual growth rate of 22.93%. The huge amount of the special transfer payment has strengthened the governing effect of the central government in relying on the top-down system and gradually formed a unique governance model of " project institutions”. Project institutions establish the hierarchical governance mechanism between the central and local governments, which not only fully arouses the enthusiasm of local governments to carry out the campaign of project competition and develop regional economy, but also increases the debt financing needs of local governments. Actually, project institutions form a financial capital chain with the project as the carrier, the central special transfer as the guide, and the local supporting funds, bank loans and other funds extensively involved. By constructing the dynamic game model which reflects the relationship between central and local governments, we analyze the impact of project institutions on financing decisions of local governments. Then based on the special subsidy and local debt data of 278 cities, we test the expansion effect on the debt of project institutions and the mechanism. The research shows that project institutions significantly promote the expansion of local debts. The effect, on the one hand, comes from the increase of debt financing of public investment demands; on the other hand, comes from soft budget constraints of the special subsidy, which may induce local governments to carry on moral risk behaviors on debt financing, and the effect is more pronounced in poorer regions. The policy implications of this paper include the following: first, a transparent and scientific project application mechanism should be constructed; second, the central government should clearly define the inter-governmental authority and expenditure responsibility as soon as possible; third, the central government needs to tighten budgetary constraints on local governments, and makes its attitudes clear at local debts and reduce the expectations for aids. The potential contributions of this paper lie in two aspects: First, previous literature is mainly based on the perspective of central-local relations, which studies the causes of local government debts, generally emphasizes the influence of the decentralization governance model characterized by " lumpism”. However, it ignores the possible debt expansion effect of project institutions, which is more characterized by centralism. Second, existing empirical literature mostly uses the data of provincial government debts or " chengtou” debts to calculate the total amount of local government debts, but the main body of Chinese government debt issuance is the local government below the provincial level, the main source of debt funds is bank deposits, and the direction of investment of debts is mainly municipal infrastructure construction projects. Therefore, we select the sum of various types of long and short term debts of urban financing platforms and fixed assets investment of municipal public facilities construction from bank loans as the agent variable of local government debts, so as to make the empirical results more reliable.
/ Journals / Journal of Finance and Economics
Journal of Finance and Economics
LiuYuanchun, Editor-in-Chief
ZhengChunrong, Vice Executive Editor-in-Chief
YaoLan BaoXiaohua HuangJun, Vice Editor-in-Chief
The Governance Model of Project Institutions and the Expansion of Local Government Debt
Journal of Finance and Economics Vol. 44, Issue 10, pp. 38 - 52 (2018) DOI:10.16538/j.cnki.jfe.2018.10.003
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Cite this article
Ji Yunyang, Fu Wenlin. The Governance Model of Project Institutions and the Expansion of Local Government Debt[J]. Journal of Finance and Economics, 2018, 44(10): 38-52.
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