This paper divides both the provincial specific transfer payment and the general public budget expenditure into four categories: science & education, social security & medical care, economic construction, and agriculture, which is based on the documents of China’s specific transfer payment. Then it uses the provincial and municipal panel data to verify the mechanism of the specific transfer payment through the comprehensive trade-off of income effect, matching effect and crowding effect. The study finds that the specific transfer payments of science & education and social security & medical care significantly reduce the corresponding science & education expenditure and social security & medical care expenditure. While the specific transfer payments of economic construction and agriculture significantly increase the corresponding economic construction expenditure and agricultural expenditure. The specific transfer payment of economic construction also significantly stimulates the other three types of the local expenditure. There are different operational logics in the specific transfer payments of science & education and agriculture. When the crowding effect is greater than the income effect, the special transfer payment of science & education will stimulate the expenditure on economic construction while reducing the local expenditure on science and education. When the income effect is greater than the crowding effect, the specific transfer payment of agriculture will be driven by the economic construction expenditure and eventually increase the local agricultural expenditure.
Does Intergovernmental Transfer Payment Stimulate the Local Special Expenditure? A Theoretical Mechanism and Its Empirical Test Based on Documents and Provincial and Municipal Data
Journal of Finance and Economics Vol. 45, Issue 10, pp. 21 - 34 (2019) DOI:10.16538/j.cnki.jfe.2019.10.002
 Fan Z Y, Zhang J. Flypaper effect: An explanation to the expanding of local governments’ size[J]. China Industrial Economics, 2010, (12): 5-15. (In Chinese)
 Fu W L, Shen K R. Equalizing transfer payment and the structure of local government’s expenditure[J]. Economic Research Journal, 2012, (5): 45-57. (In Chinese)
 Jia J X, Guo Q W, Gao L. Central fiscal transfer payment, incentive effect and inter regional fiscal expenditure competition[J]. Finance & Trade Economics, 2010, (11): 52-57. (In Chinese)
 Jia X J, Yue X M, Wang Y P. Block grants, local expenditures and equalization of basic public services: An implication for the reform of transfer payments[J]. Finance & Trade Economics, 2015, (4): 7-18. (In Chinese)
 Liao C H. Research on regional imbalance of government educational expenditures[J]. Economic Research Journal, 2004, (6): 41-49. (In Chinese)
 Liu S Z, Zeng M, Tan X Y. Game theory in process of matching transfer payment: Phishing or anti phishing[J]. Expanding Horizons, 2013, (1): 43-48. (In Chinese)
 Liu Y, Liu W G. The impact of transfer payment on the scale of local expenditure: Evidence from national county panel data[J]. Economic Science, 2015, (2): 58-69. (In Chinese)
 Song X N, Ge R. The effect of fiscal grant on mania of infrastructure spending: Based on vertical tax competition theory[J]. Wuhan University Journal of Humanity & Social Science, 2014, (4): 117-123. (In Chinese)
 Xiao G S, Zheng G H. Fiscal and finance[M]. Beijing: China People’s Public Security University Press, 2002. (In Chinese)
 Yang L S. The effect of intergovernmental fiscal transfer on local education expenditures: Based on data from 2001 to 2009[J]. Tsinghua Journal of Education, 2016, (3): 74-84. (In Chinese)
 Zhang G. The impact of intergovernmental transfers on county educational expenditure: The cases of Zhejiang, Hubei, and Shanxi[J]. Education & Economy, 2006, (2): 29-32. (In Chinese)
 Boadway R. Intergovernmental transfers: Rationale and policy[A]. Ahmad E, Brosio G. Handbook of multilevel finance[C]. Cheltenham: Edward Elgar Publishing, 2015.
 Bucovetsky S. Federalism, equalization and risk aversion[J]. Journal of Public Economics, 1998, 67(3): 301-328. DOI:10.1016/S0047-2727(97)00076-5
 Hines J R, Thaler R H. The flypaper effect[J]. Journal of Economic Perspectives, 1995, 9(4): 217-226. DOI:10.1257/jep.9.4.217
 Moffitt R A. The effects of grants-in-aid on state and local expenditures: The case of AFDC[J]. Journal of Public Economics, 1984, 23(3): 279-305. DOI:10.1016/0047-2727(84)90032-X
 Shah A. Provincial transportation grants to Alberta cities: Structure, evaluation, and a proposal for an alternate design[J]. Quantity and Quality in Economic Research, 1985, (1): 59-108.
 Shah A. An empirical analysis of public transit subsidies in Canada[J]. Quantity and Quality in Economic Research, 1988, (2): 15-25.
 Shah A M C. A linear expenditure system estimation of local fiscal response to provincial transportation grants[J]. Journal of Applied Economics & Policy, 1989, (9): 150.
 Smart M. The incentive effects of grants[A]. Boadway R W, Shah A. Intergovernmental Fiscal Transfers[C]. Washington: Banco Mundial, 2007.
 Wildasin D E. Income redistribution in a common labor market[J]. The American Economic Review, 1991, 81(4): 757-774. DOI:10.2753/PET1061-1991340679
 World Bank. China-national development and sub-national finance: A review of provincial expenditures[R]. Washington, DC: World Bank, 2002.
Cite this article
Yao Dongmin, Li Jing, Chen Yijing. Does Intergovernmental Transfer Payment Stimulate the Local Special Expenditure? A Theoretical Mechanism and Its Empirical Test Based on Documents and Provincial and Municipal Data[J]. Journal of Finance and Economics, 2019, 45(10): 21-34.
Previous: Does “the Restriction of Real Estate Investment” Facilitate Technology Innovation? — Evidence from a Quasi-natural Experiment of Central State-owned Enterprises