The aim of this paper is to test a variety hypotheses concerning the impact of fiscal decentralization on the public sector in mainland China. Pooled cross-sectional and time-series data are employed in the analysis, and the period to be considered is from 1986 to 1994. An error components techniques is also utilized for empirical testing.
The empirical results provide evidence in support of the Oates/Wallis hypothesis and collusion; the findings confirm that an increase in fiscal decentralization leads to a higher level of provincial government expenditure. In addition, the central and provincial governments are found to have an incentive to form collusive agreements through extrabudgetary funds.
