Event Recap: Ma Guangrong on Incentives and Risks in Fiscal Decentralization

DATE: 2021-12-08

        On December 6, 2021, SAGE hosted an online lecture by Professor Ma Guangrong on “Incentives and Risks in Fiscal Decentralization.” The webinar was the fourth event in SAGE's “Lectures in Government and Economics Series,” in which renowned friends and members of SAGE share their work in the field of government and economics. For this lecture, we were fortunate to hear from Ma Guangrong, Professor in the School of Finance at Renmin University, Deputy Director of the Department of Public Finance, and Young Yangtze River Scholar with the Ministry of Education.  

        Professor Ma presented his research on local governments and fiscal decentralization, pointing out that a higher level of decentralization is heralded as a way to strengthen local government incentives for economic development, but we must also consider that it raises local government risks. Professor Ma's research uses Chinese data to test the theoretical inference that when the volatility of total tax revenue is higher, the retention rate for localities is lower, and thus the proportion of fixed transfers from the central government is higher. Ultimately, this was found to be true in the Chinese case. Professor Ma explained that the research findings from this study contribute to the second generation of fiscal decentralization theory and principal-agent theory by emphasizing that trade-offs between incentives and risks must be considered in revenue sharing between higher and lower levels of government. The findings also have policy implications for the Chinese system and for World Bank recommendations, which often promote reform toward fiscal decentralization. Professor Ma's paper cautions that giving more fiscal power to local governments may lead to greater volatility in their fiscal revenue, so central governments should consider ways to mitigate the risks of local governments in balance with the incentives of decentralization.

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