Fiscal Decentralization, Satisfaction with Social Services, and Inequality Under the Hukou System

Abstract

It is generally agreed that decentralized decision-making is conducive to the efficient allocation of resources, but detrimental to the equitable redistribution of income. This paper is intended to investigate the effect of fiscal decentralization on the delivery of three social services in the Chinese context. Using the data from a nationally representative survey, we find that fiscal decentralization in China, in both expenditure and revenue measures, significantly improves individuals’ satisfaction with social services for the sick, for the elderly, and for the poor. However, in contrast to urban local residents, rural dwellers and unregistered city migrants under the household registration (hukou) system benefit substantially less from the decentralized delivery of social services. These findings are robust to alternative model specifications. Our evidence from China not only sheds new light on the debate over the impact of fiscal decentralization on income redistribution, but also contributes to understanding the role of institutions in determining subjective well-being and its unequal distribution among people.