The Lame-Duck Effect and Fiscal Policy in China

Abstract

The lame‐duck effect, driven by the reelection mechanism in democratic countries, has been widely examined, but few studies of non‐democracies in this area exist. Our paper argues that the age‐limit effect in China may result in a similar lame‐duck effect: an official facing binding age limits has fewer incentives to put effort into work, resulting in contractionary fiscal policies. Using data from 30 Chinese provinces from 1980 to 2006, the empirical analysis finds a provincial leader over official retirement age but still in office has an incentive to decrease tax revenue and expenditures. Specifically, a provincial leader prefers to decrease public spending on capital construction, public goods and agricultural subsidies. Also, a provincial leader's age is negatively correlated with the public spending in his or her jurisdiction. Our empirical results indicate that career concerns of politicians in China created by the age‐limit rules of the cadre management system may hinder local economic prosperity.