Intergovernmental fiscal relationship in China: a simple model based on the nonsymmetric Nash solution

Abstract

We propose a new empirical approach to analyze fiscal decentralization and apply it to Chinese intergovernmental fiscal relationships between the central government and provincial governments, using nonsymmetric Nash solution. In calculating budgetary revenue and expenditure shares, we include extra budgetary revenue and expenditure. We find that although an increase in either income inequality or real per capita GDP lowers local governments’ bargaining power within the budgetary system, local governments can offset this by obtaining more bargaining power over extra budgetary expenditures. Another finding is that although urbanization increases provincial governments’ budgetary revenues, it also restricts the scope for further budgetary expenditure.