The author aims to study the impacts of fiscal decentralization and soft budget constraint on the scale of local government debts. Moreover, the effect of soft budget constraint on the scale of local government debt under the different extent of fiscal decentralization will be discussed.
Due to the linkage between economic growth and the fiscal decentralization, the expansion in the local government debt is closely related to the fiscal decentralization and the soft budget constraint (SBC) – the expectation that the local governments would be bailed out by the central government if they face debt challenges.
Based on the literature fiscal decentralization is linked to local government debts as literature indicates that fiscal decentralization leads to the decentralization of the expenditure without the revenue collection powers. The Chinese local governments have increased expenditure budgets on public services but the powers of taxation are centralized. To bridge the revenue gaps, the local governments take up debts that are sunk into infrastructure and other low revenue generating investments. Soft budget constraints are thus a product of fiscal decentralization as they are based on the principal – agent relationship between the politicians and the voters, central government and local government and the local governments and the SOEs within the local jurisdictions.
Table of Contents
1. Research Objective
2. Literature review
2.1 Definition of basic concepts
2.1.1 Local government debt
2.1.2 Fiscal decentralization
2.1.3 Soft budget constraint
2.2 The scale of local government debt
2.3 Fiscal decentralization and the scale of local government debt
3. Research Gaps
4. Short statement listing other planned sections within the literature review chapter
5. Methodology
5.1 Variable definition
5.1.1 Size of local government debt (DEBT).
5.1.2 Financial decentralization indicators (FD).
5.1.3 SBC.
5.1.4 Control variables.
4.2 Data sources
4.3 Dynamic panel model
4.3.1 Model setting
4.4 Panel threshold model
4.4.1 Model settings
4.4.1.1 Settings for the model
4..4.1.2 Model estimation method
Research Objectives and Core Themes
The primary objective of this research is to empirically investigate the relationship between fiscal decentralization, soft budget constraints (SBC), and the expansion of local government debt within the Chinese context. The research aims to clarify how the centralization of taxation powers combined with decentralized expenditure responsibilities creates revenue gaps that lead to significant local debt accumulation.
- The link between fiscal decentralization and local government debt growth.
- The role of soft budget constraints as a driver for inefficient investment behavior.
- The impact of institutional principal-agent relationships on public sector borrowing.
- Empirical analysis of debt scale under varying degrees of fiscal decentralization using dynamic panel and threshold models.
Excerpt from the Book
2.1.3 Soft budget constraint
Soft budget constraint is an economic concept that was first conceived by Kornai (1979) in offering an explanation to the phenomenon where the government is engaged in continuous rescues of the state owned enterprises (SOEs) that rare facing losses under the planned economic systems of socialist governments. Park (2016) in a review of the soft budget constraints in South Korea noted that soft budget constraints is a concept that reflects on the existing social relationship between the organization that expects the assistance and the organization that is willing to help. Soft budget constraints are thus based on the principal – agent relationship between the politicians and the voters. Kornai (1979) noted that the term alludes to the situation where a firm that is loss making is assisted or bailed out by another institution, bank or the government.
The expectation of the manager of the firm is that a rescue will be forthcoming when there are signs of trouble; thus such an expectation is a critical factor that affect the behavior of the firm. Vahabi (2011) noted that soft budget constraint a concept first developed by Janos Kornai was aimed at explaining the micro-foundation of the shortage economics as being a normal occurrence in socialist economic systems. Vahabi (2011, p. 1) noted that the concept refers to “ex-port bailout” of firms in paternalistic state which are loss making. Scholars have explored the concept especially beginning in the 1970’s to explore whether SBC should remain to be considered as a macroeconomic concept or it is a form of redistribute policy in macroeconomics aimed at ensuring wage and job security.
Summary of Chapters
1. Research Objective: Outlines the connection between fiscal decentralization, soft budget constraints, and the rise of local government debt in China, defining the study's key research questions and hypotheses.
2. Literature review: Provides a theoretical framework defining core concepts like local government debt, fiscal decentralization, and soft budget constraints, while reviewing existing scholarly views on their interrelations.
3. Research Gaps: Identifies the limitations in current literature, highlighting the lack of empirical analysis on the combined effects of SBC and fiscal decentralization on Chinese local debt.
4. Short statement listing other planned sections within the literature review chapter: Briefly mentions the plan to examine how fiscal decentralization impacts local government capacity to service debt.
5. Methodology: Details the empirical research design, including variable definitions, data sources, and the application of dynamic panel and panel threshold models to measure debt impacts.
Keywords
Local government debt, Fiscal decentralization, Soft budget constraint, China, Economic growth, Principal-agent relationship, Infrastructure investment, Public services, State owned enterprises, Dynamic panel model, Panel threshold model, Budget Law, Financial risks, Fiscal revenue, Marketization.
Frequently Asked Questions
What is the core focus of this research paper?
The paper focuses on the nexus between fiscal decentralization, the soft budget constraint phenomenon, and the resulting accumulation of debt by local governments in China.
What are the central thematic areas of the study?
The central themes include the political economy of fiscal decentralization, the mechanism of bailouts for state-owned enterprises, and how these factors create unsustainable local government debt levels.
What is the primary research objective?
The primary objective is to empirically test whether fiscal decentralization and soft budget constraints have a positive impact on the scale of local government debt.
Which scientific methods are employed in this study?
The study utilizes an empirical approach, employing a dynamic panel model and a dynamic panel threshold model to analyze the relationship between the chosen variables across Chinese provinces from 1994 to 2014.
What is covered in the main section of the paper?
The main sections cover the definition of variables (like debt and fiscal decentralization indicators), the collection of panel data from Chinese yearbooks, and the technical specification of regression models.
Which keywords define this work?
Key terms include local government debt, fiscal decentralization, soft budget constraint, and Chinese economic reform.
How is the "Soft Budget Constraint" (SBC) defined in the context of this paper?
SBC is defined as an expectation by an organization (typically an SOE) that it will be bailed out by the central or local government if it faces financial difficulties, which distorts firm behavior.
Why does fiscal decentralization in China lead to higher debt?
The paper argues that because China decentralized expenditure responsibilities without decentralizing taxation powers, local governments face revenue gaps and incur debt to fund infrastructure and public services.
What role does the "Panel threshold model" play?
The threshold model is used to investigate whether the effect of the soft budget constraint on local government debt changes depending on the degree or extent of fiscal decentralization.
What data sources are utilized for the empirical analysis?
The study uses annual panel data from 1994 to 2014 derived from official publications, including the China Fixed Assets Statistics Yearbook, China Statistics Yearbook, and the China Fiscal Yearbook.
- Quote paper
- David Onditi (Author), 2019, The impact of fiscal decentralization and the soft budget constraint on the local government debt, Munich, GRIN Verlag, https://www.grin.com/document/507966
