Observe Tax-Sharing System Reform Of China By Studying Principal-Agent Relationship Of The Supply Of Public Goods

Since 1994, the tax-sharing system, as a stable fiscal system in China, has made important contributions to China's economic development and significantly improved the living standards of Chinese people. However, the problem of the supply of public goods in recent years is paid increasing attention. At the same time, local governments of China have a heavy reliance on Land Finance. So people are attaching importance to the tax-sharing system reform of China.The article studying the tax-sharing system reform of China is based on the supply of public goods. According to the actual situation in China at this stage, the tax-sharing system currently applied in China is seen as a financial share structure. Correspondingly, the relationship between central and local government is seen as the principal - agent relationship in the supply of public goods. So, the classic principal-agent analysis framework can be used for investigating the incentive cost of local government. Excessive incentive cost would make the central government give up encouraging local governments to supply the public goods. Then local governments can't have sufficient financial resources. That is the important reason for which Chinese current allocation of fiscal resources is unreasonable and the public goods supply efficiency is lost. Model analysis show that, despite the existence of asymmetric information, the best incentive costs is available only if local government is given an appropriate incentive contract. By studying the residual claim of supply of public goods and the limited liability of local government, the optimal cost can not be showed to be achieved. For lower the cost, the tax-sharing system reform should be further promoted and perfect with the help of political system reform.