YUAN Deyu,SONG Xiaoning：Central Government Transfer Payments and Local Government Investment Decisions in China

Abstract：This paper studies the mechanism of central government transfer payments on local government investment based on local government investment decision-making model, and conducts an empirical research on the effects of transfer payments on local government investment using provincial panel data of China from 1995 to 2006.We find that non-earmarked and earmarked transfer payment both have a significantly positive effect on local government investment, and the effect of non-earmarked transfer payment on local government investment is greater than earmarked transfer payment.In the study, we also find that: for the less developed areas, earmarked transfer payment has a significantly positive effect on local government investment, but it doesn't exist in developed regions; non-earmarked transfer payment has a significantly positive effect on basic construction investment, but it doesn't happen on agriculture infrastructure investment.

Key words： Central Government Transfer Payments    Government Investment    Flypaper Effect    System GMM

source:Finance & Trade Economics ,No.3,2015