ABSTRACT
Fiscal decentralization can prompt more efficient provisions of local public goods if individuals can freely move across localities. China, like many developing countries, has undergone a process of fiscal decentralization. Much of the literature on fiscal federalism focuses on the economic efficiency aspect of market competition. This chapter discusses the major theoretical arguments on decentralization and provides empirical analysis and shows why the results seemingly conflict with theoretical predictions. It presents a more thorough and quantitative examination of decentralization’s impact. The uneven regional development in non-farm activities in the rural sector has been regarded as one of the major driving forces behind the changes in rural regional inequality. The chapter utilizes a more quantitative method to examine the impact of initial economic structures and fiscal dependent burdens on subsequent local economic growth. Fiscal decentralization may bring about detrimental distributional consequences when the economic structure differs and government sizes are excessive.
