Dose Land Negotiation Policy Promote or Suppress Hidden Debts of Local Governments?

Abstract

Using panel data from 275 prefecture-level cities in China spanning from 2003 to 2019, this paper employs the multiperiod difference-in-differences method to empirically analyze the policy effect of land negotiation policy on local governments’ hidden debt. The paper also investigates the influence mechanisms of land finance, budget soft constraints, fiscal decentralization and government competition. The empirical results reveal that: (1) Land negotiations promote the expansion of local governments’ hidden debt, which is counterproductive to the sustainable development of government finances. (2) The impact of land negotiation policy on local government’s hidden debt is transmitted via its effects on land finance. (3) The greater the degree of soft budget constraint and the degree of government competition, the less the expansion effect of land negotiations on the hidden debt of the government. The greater the degree of fiscal decentralization, the greater the expansion effect of land negotiations on the government’s hidden debt. (4) Land negotiation promotes the expansion of hidden debt in eastern China and inhibits it in central China, with no significant effect observed in western China. (5) Cities with larger urban scale and higher economic development levels experience stronger effects from land negotiation policies. Therefore, it is imperative to deepen the land negotiation system further, develop policy indicators and feedback mechanisms tailored to local conditions, and introduce a multiparty supervision system to enhance implementation of the land negotiation system.

Has the Reform of Land Reserve Financing Policy Reduced the Local Governments’ Implicit Debt?

“…Therefore, this study incorporates the following control variables: (1) Per capita land transfer income (landrev) measured by the income from per capita land transfer [23]. (2) Economic growth (pgrow) represented by the annual growth rate of GDP [2]. (3) Urbanization rate (urban) denoted by the proportion of the urban resident population to the total resident population in the region [2].…”

“…(2) Economic growth (pgrow) represented by the annual growth rate of GDP [2]. (3) Urbanization rate (urban) denoted by the proportion of the urban resident population to the total resident population in the region [2]. (4) Fiscal gap (fisgap) measured by the ratio of the difference between general public budget expenditures and general public budget revenues to GDP [23].…”

“…This phenomenon has resulted in unclear distinctions between responsibilities and expenditure obligations, as well as a growing gap between local fiscal revenues and expenditures. Consequently, local governments have been motivated to borrow [2,3]. In terms of soft budget constraints, the expansion of implicit debt fundamentally stems from an expansion of local government moral hazard [4,5].…”