The Impact Of Fiscal Decentralization On Public Expediture And Urban Development

Since the 1970s, especially during the last two decades, fiscal decentralization has become a worldwide trend. Based on the review of fiscal decentralization theory, this thesis tries to study how fiscal decentralization affects public expenditure and urbanization. The main contents and the conclusions are as follows:First, the relationship between the fiscal decentralization and the government size is discussed. This thesis makes the first attempt to explore the motivation of Government's behavior from revenue decentralization perspective. Numerous researchers do not consider different forms of government fiscal revenue, because of supposing the same effect between revenue and expenditure decentralization, and we deny it. This thesis builds a simple model to study how variations in the fiscal system affect government decision making in Chapter3. Generally, increase the degree of decentralization of local government will expand the supply of public goods, reduce corrupt spending, thereby reducing the size of government. Increase the degree of decentralization will also increase the government size while the degree is low enough. The hypothesis will be testified by using data from aggregate (1982～2005), national (1982～2005), province (1982～2005) and city government (1982～2005).Secondly, Chapter4 discuses how fiscal decentralization affects all levels of public expenditure structure. There are two reasons to distort China's local government expenditure structure, first, compared with the infrastructure construction, human capital expenditures have strong positive externalities, Second, infrastructure investment may lead to aggregation effects, under the assumption that the economy of scale, because All-or-Nothing of competition, regional competition will cause excessive infrastructure. We, using data on aggregate government, province and city, shows that increase degree of fiscal decentralization lead to increase the percentage of infrastructure and decrease the percentage of human capital investment at the province and city level, while there does not exist a strong relationship between decentralization and aggregate government expenditure structure. Thirdly, this thesis makes the first attempt to explore the relationship between decentralization and urbanization. We build a model to explain the optimal city size based on fiscal decentralization in Chapter5. The model demonstrates that the fiscal decentralization has structure effects on city size. Decentralization will increase the size of small city while decrease the size of big city. In chapter 6, we test the effects of decentralization, education, FDI on urbanization, and verify the structure hypothesis by using panel data on 226 cities form 2000～2006.