Promotion incentives, tenure uncertainty, and local government debt risk

Abstract

In this paper, we investigate how officials’ promotion incentives and tenure uncertainty affect the local government debt risks in China. We find that the promotion incentives of officials could increase the local government debt risk, but there is no direct relationship with explicit local debt risk. There is a significant U-shaped relationship between officials’ promotion incentives and local government debt size as tenure uncertainty increases. Our results remain robust after replacing the explanatory variables and endogeneity tests. Furthermore, local government debt risk is more likely to be affected by promotion incentives and tenure uncertainty when local officials have been promoted or work in eastern China. The influence of province governors on local debt risk is more relevant than that of provincial party secretaries.