1 Resources for the Future, 1616 P St. NW, Washington, DC 20036, USA; Department of Economics, Cheung Kong Graduate School of Business, Oriental Plaza Tower E2, 2/F 1 East Chang An Ave., Beijing 100738, China
2 School of International Relations and Pacific Studies, UC San Diego, La Jolla, CA, USA
This article provides new evidence that fiscal decentralization has supported economic development by incentiving cities to provide more sewage infrastructure. As a result of the 1994 tax reform, Chinese cities retained different shares of their value-added tax (VAT). Exploiting the persistence of this sharing system, we use the VAT share in 1995 as an instrument for the present fiscal incentives. We find that cities with higher fiscal incentives built significantly more sewage treatment capacity between 2002 and 2008. This result suggests that fiscal incentives can play a strong role in the development of city-level infrastructure.
Ebenstein, A. 2012. “The Consequences of Industrialization: Evidence from Water Pollution and Digestive Cancers in China.” The Review of Economics and Statistics 94:186–201.10.1162/REST_a_00150)| false
Shah, A. 2006. “The Reform of the Intergovernmental Transfer System to Achieve a Harmonious Society and a Level Playing Field for Regional Development in China.” World Bank Policy Research Working Paper 4100.
Shah, A. 2006. “The Reform of the Intergovernmental Transfer System to Achieve a Harmonious Society and a Level Playing Field for Regional Development in China.” World Bank Policy Research Working Paper 4100.10.1596/1813-9450-4100)| false
Stock, J. H., J. H. Wright, and M. Yogo. 2002. “A Survey of Weak Instruments and Weak Identification in Generalized Method of Moments.” Journal of Business & Economic Statistics 20:518–29.10.1198/073500102288618658)| false