Abstract：The operation of the local governments in China has become excessively dependent on land-based financial revenue. This dependence has been regarded as a major threat to the local public financial system. In this paper, we analyzed the strategies of land transfer taken by the local governments after financial reform in 1994, and proposed the hypothesis that the restrictions from the central government against land transfer in the local would distort the incentive structure of the local governments which leads to so-called land-based finance phenomenon. Using the panel data of 30 provinces from 2003 to 2009, we empirically tested our hypothesis through Dynamic Panel Data estimation. The findings indicate that central government should raise its shares in the land transfer fees but reduce restraints on local governments’ land transfer in the upcoming fiscal decentralization reform. At the same time, local governments’ shares in the value-added tax should be increased to make it one of the main sources of local government revenue. We think this policy suggestion could be a feasible scheme to reform land-based finance structure and to improve the “County Competition” Mechanism in China.
Keywords: Land-based Finance, Negative Land Prices Subsidy, Dynamic Panel Data Model
source:Finance & Trade Economics ,No7,2013