The spatial spillover effect of fiscal decentralization on local public provision: Mathematical application and empirical estimation

Abstract

This paper examines the spillover effect of fiscal decentralization on the provision of local public goods. The paper's objectives are as follows. First, we seek to discuss whether fiscal decentralization can affect “Promotion Tournament Game” among local governments through spillover effect of local public goods supply. Second, we also examine the intrinsic mechanism of such decentralized spillover effect. Finally, we analyze, if the spillover effect is possible, how much influence of fiscal decentralization on local public provision from both expenditure and revenue perspectives. Our analysis is based on a user fee model. The panel data from 31 Chinese provinces for the period of 1994–2013 are estimated using the spatial econometric method. The results show that revenue decentralization is negatively related to the local public provision, which is consistent with the “Leviathan hypothesis”. However, expenditure decentralization leads to an increase in the local public provision, which statistically proves the fierce competition in “Promotion Tournament Game” among Chinese governments.