Political Budget Cycles in China: Corruption, Incentive Role and Time Inconsistency

Abstract

This paper studies the political budget cycles of provincial governments in China and explores the channels that drive such cycles. It finds that in addition to good economic performance, being clean (or staying away from corruption) is an important factor in provincial leaders’ chances of promotion. Given these promotion incentives, this paper establishes a model to describe the decision-making process of political leaders regarding fiscal expenditures, and conducts an empirical test of the model using Chinese provincial-level data from 1990 to 2010. The findings show that promotion incentives drive cyclical fluctuations in various types of fiscal expenditures that are synchronized with the timing of the National Congress of the Communist Party (NCCP). Specifically, the growth rate of infrastructure expenditure significantly reduces, while that of administration expenditure increases during the years in which the NCCP takes place. This paper also tests another possible channel of political budget cycles; that is, the time inconsistency effect caused by the turnover of provincial leaders. This effect turns out to be insignificant for all types of expenditures.