Theoretical And Empirical Research On The Interaction Mechanism In Budgetary And Land Financing Of Prefecture Level Governments

Researches on the behavior of local governments are common in public economics. Under the current politic system of China, central government regards the development of economics as the most important task and has formulated assessments on political performance to local governments, which lays emphasize on the local GDP. However, the imbalance between the finance ownership and the expenditure increases the financial deficit. To be rational, local governments have to find other ways to acquire more money, which will be used to cater to the leaders and benefit the staff. So, during the urbanization, local governments have discovered a mechanism, which relies on the interaction between budgetary receive and land financing receive.In this paper, we will discuss the mode above through a mathematical model based on the prospective of vertical game between provinces and cities in China. There will be a theoretical study on the interaction mechanism between budgetary receive and land financing receive, finding the relation and influence factor of the two sources of income. We use simultaneous equations and the instrumental variables in panel data of cities in China from 2003 to 2009 to help the study and the result has confirmed the theory we have discussed above, and we find there is a positive interaction between the two sources of income. This mechanism can help local government solve the fund shortage to urbanization and increase the potential tax, on the other hand, the increasing tax receive can contribute to larger amounts of land transferring fee because of the high land price which is capitalized by the competitive surroundings. This feedback mechanism boosts the high speed economic development of China, which was a miracle in the global economics. At last, the analysis in this chapter offers a lot of political implications to help harmonize the vertical fiscal relation and develop the stable revenue source of local governments in medium or long time.