ABSTRACT
This chapter analyzes the “third” hand of a local government in China: the caring hand, which is largely ignored in the literature on the behavior of local governments in a decentralized fiscal system. The incentive for a local government to lend its caring hand is quite different from the motivation to help township and village enterprises and provide other public goods. While technically a unitary state, China is a highly decentralized country with a high degree of autonomy enjoyed by local governments. The collusive relationship between local governments and local enterprises works as a mechanism to keep the information of local businesses hidden from higher-level governments. China’s rural health care system, established under a centrally planned economy, was widely regarded as a success. Responsibility for the financing and management of township and village health facilities was devolved to township governments.
