Competition among Local Governments: Healthcare Expenditure under Fiscal Decentralization

Abstract

Medical and health services concerns the well-being of people. It is fundamental for promoting the construction of China’s people-centered health strategy and realizing the development for the benefit of all. This study proposes a theoretical model of yardstick competition from the top” and discusses the existence of inter-city tactful interaction behaviors in healthcare spending among prefectural-level municipal governments within the framework of a decentralized system. Very often, healthcare spending decisions made by prefectural-level municipal governments are influenced by the relevant strategies of the neighboring cities. Based on the data from 283 prefectural-level cities in China from 2007–2013, and using the dynamic spatial Durbin model (SDM), empirical tests are performed at the prefectural level to investigate the effects of interactions between cities within the same province, as well as the impacts of fiscal decentralization and its spatial tactful interactions in healthcare spending. We conclude that significant strategic interactions exist among municipal governments in government healthcare spending. Furthermore, the strategic interaction of government healthcare spending belongs to complementarities. This indicates that if the adjacent municipal government raises the level of healthcare spending in the same province, the city government's optimal strategy will be to increase the level of government health spending accordingly, with cities characterized by geographical proximity and competing more strongly for government healthcare spending. Moreover, fiscal decentralization seems to drive the supply of government health services, as tactful interactions tend to limit government health spending. This explains why the share of government health spending has been hovering at around 2%. Overall, the implementation of competitive or incentive mechanisms and optimized financial arrangements emerge as a truly effective policy to stimulate the supply of government health services. The potential contributions of this paper are as follows. Firstly, in theoretical research, considering welfare maximization decision-making under the restriction of limited resources, this paper develops a top-down” competition model for government healthcare spending between municipal governments using the interaction theory framework. Secondly, the dynamic spatial Durbin model (SDM) is used to solve the path dependence” characteristics of government healthcare spending and to ease the problem of endogeneity. The research conclusion is more accurate after a comprehensive consideration of government healthcare spending over time, space, and time-space lag effects. Thirdly, based on a panel data of 283 prefectural-level cities from 2007–2013, this paper projects a micro and accurate description of the competing behaviors of prefectural-level city governments. Finally, from a research perspective, this paper contributes practical value by examining the strategic interactions in government healthcare spending behaviors, and shows the short- and long-term effects of fiscal decentralization and the strategic competition for space in government healthcare spending.