Promotion Incentive: Corruption and its Implications on Local Fiscal Cycles in China

Abstract

In addition to economic performance, this paper explores another incentive factor of local political leaders in China---being clean (or staying away from corruption). Our data suggests that both factors are crucial to provincial leaders’ promotion. Given these incentives, this paper establishes a model to describe the decision-making process of political leaders regarding fiscal expenditures, and conducts an empirical test of political budget cycles using Chinese provincial-level data from 1990 to 2006. The findings show that promotion incentives drive cyclical fluctuations in various types of local 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.