Intergovernmental Fiscal Arrangements and Provincial Consumption Risk Sharing in China

• Published in: Emerging markets finance & trade Vol. 50; no. 3; pp. 45 - 58
• Main Authors: Lai, Jennifer T., So, Erin P. K., Yan, Isabel K. M.
• Format: Journal Article
• Language: English
• Published: Abingdon Routledge 01-05-2014; M.E. Sharpe, Inc; Taylor & Francis Ltd
• Subjects: China (People's Republic); Consumption; Contracts; Decentralization; divergence and convergence of fiscal decentralization; fiscal decentralization; Fiscal policy; fiscal reform; intergovernmental fiscal relations; provincial consumption risk sharing; Revenue; Risk; Risk sharing; Studies; Tax revenues; transfer system; China
• ISSN: 1540-496X; 1558-0938
• DOI: 10.2753/REE1540-496X500303

This paper utilizes a panel data set on two major fiscal reforms in China-the fiscal contract system (FCS) in 1980-93 and the tax-sharing system (TSS) after 1994-to examine how the various aspects of intergovernmental fiscal arrangement affect the ability of the fiscal system to facilitate risk sharing. The high revenue decentralization and the proliferation of extrabudgetary revenue items in the FCS generally weakened the central government's ability to support interprovincial risk sharing. This situation was reversed in the TSS period. In addition, the effect of central-to-local transfer (transfer-in) and local-to-central transfer (transfer-out) on risk sharing was asymmetric in the sense that transfer-out enhances risk sharing but transfer-in does not.