Broadband infrastructure and local government fiscal risk: evidence from China

Abstract

ABSTRACT Network infrastructure is a cornerstone of Internet applications and digital economy. In this paper, we primarily evaluate the effect of broadband infrastructure on local government fiscal risk by using the enforcement of the ‘Broadband China’ Strategy (BCS) as an exogenous shock. After a simple theoretical analysis by establishing a three-department endogenous growth model, we conduct a staggered Difference-in-Differences (DID) estimation and use a panel datum of China’s 285 prefecture-level cities from 2003 to 2019, finding that the BCS policy apparently reduces fiscal risks of the pilot cities compared to the untreated ones. This impact is achieved through two channels: the enlargement of data creation and the enhancement of data use efficiency. Moreover, we discover that this policy contributes more to cities with mature IT industry, deepened information consumption, strong innovation capabilities and flourishing cross-border e-commerce. In addition, it is demonstrated that cities with severe financial burden always benefit more from the BCS policy; meanwhile, the policy effects will spill over to surrounding districts. Finally, we find that the construction of broadband infrastructure greatly improves residents’ satisfaction with local government. Overall, this paper provides constructive insights into broadband infrastructure for diminishing local government fiscal risks in developing countries.