Decentralization with political trump: Vertical control, local accountability and regional disparities in China

Motivated by Chinaʹs experience in the reform era, we study the fiscal relations between central and local governments embedded in a vertical control system with local officials appointed by the central government. The probability of their re-appointment depends, in part, on how well they perform in fulfilling their mandates from above. Self-interested local bureaucrats decide on the amount of predatory charges to be collected and the amount of public goods provided to increase their chances of survival, while at the same time maximizing the expected surplus accruing to their private agendas. Within the framework of this model, we explore how such issues as fiscal decentralization, local accountability and regional disparities interact with the stringency of the vertical control system. The paper also contributes to the discussion of the divergent experience of China and Russia.