Information transparency, monitoring, and incentives under decentralization: Evidence from China's fiscal reform of “province managing county”

Abstract

Abstract Monitoring is deemed crucial for the incentivization of a decentralized organization, but its function relies on information transparency between the central authority and the delegated individuals. We test this hypothesis by considering changes in the fiscal behavior of Chinese county governments following an exogenous fiscal reform in 2004/2005 that removed information obstacles between provinces and counties. Employing data on 590 Chinese counties from 2000 to 2009, we find that counties in the reform provinces adopt a more proactive fiscal policy after the reform, suggesting that they become more incentivized in the political competition for economic growth. Such effects are stronger in counties with fewer competing peers and counties with either high or low ranks in the records of economic growth among peers. The increase in counties' productive spending leads to higher economic growth in later years.