Central-local Fiscal Relationship: Coordination Failure and Fiscal Deficit Expansion Bias of Local Governments

Abstract

Based on the theoretical hypothesis that coordination failure of central-local fiscal relationship leads to fiscal deficit expansion bias of local governments and the reality background, this paper constructs a coordination game theory model, and uses the regression analysis of GS2SLS and System GMM of provincial spatial panel data model from 1995 to 2012 to systematically study the mechanism of the effect of central-local fiscal relationship on fiscal deficit expansion bias of local governments. It comes to the conclusions as follows:there is mutually imitation behavior of local governments in terms of fiscal deficit decision-making, and the central government actually coordinates fiscal deficit decision-making behavior of local governments by fiscal coordination mechanism, but it has not been a success. It means that there is really a coordination failure of Chinese central-local fiscal relationship, thereby resulting in the economic phenomenon of constant fiscal deficit expansion of local governments.