The Impact of Fiscal Decentralization on Urban Agglomeration: Evidence from China
Alfred M. Wu ; Lin Ye ; Li Hui
Lin Ye
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Abstract
In the literature on urban studies, the size distribution of cities has been attributed to a
random growth process where transportation externalities, congestion costs, and capital
formation all play a crucial role. However, the classic economics models do not fully
capture the impact of political institutions, particularly fiscal decentralization, on urban
size distribution and fail to explain the political economy of urban agglomeration. As a
major transitional economy, China’s economic decentralization, in conjunction with
political control, portends a more complex environment for urban agglomeration and offers
a new ground to analyze its institutional roots and policy implications. This study employs
a panel data analysis of Chinese provinces between 1994 and 2015 and finds a pattern
where more decentralized regions (provinces) are associated with stronger dominance of
large cities for the whole study period. However, the period between 1994 and 2003
displays a different pattern wherein fiscal decentralization is negatively associated with
urban agglomeration. Such phenomena can be attributed to the heated competition among
local governments and the absorption of resources by dominant cities under the framework
of fiscal decentralization in China, particularly in the recent years. More effective
coordination is called upon to mitigate the unintended outcome of fiscal decentralization
without proper control in shaping urban hierarchy in China and the findings provide lessons
for other developing countries.
Keywords
Fiscal Decentralization, Urban Agglomeration, Equalization, Development, China
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Publisher
Series/Report No.
Accepted Papers;LKYSPP 18-13
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Date
2018-08-15
DOI
Type
Working Paper/Technical Report