Public Expenditure Interactions of Chinese Local Governments: A Simultaneous Equations Network Approach

Fiscal competition, mimicking, and interactions among local governments exist as a complex network. To better model and estimate public expenditure interactions of Chinese local governments, we adopt a simultaneous equations network approach in which spatial dependence of multiple components of local governments’ spending and also the internal competition among different components of public expenditure within the same city are considered. Using Chinese county-level fiscal data, we find that the endogenous peer effect for capital construction expenditure is positive among Chinese local governments, capital construction expenditure and administrative expenditure are complements rather than substitutes, there is no fiscal mimicking of social welfare expenditure, and there is a strong crowd-out effect of administrative expenditure on social welfare spending.