Intergovernmental Fiscal Relationships in China: A Simple Model Based on the Nonsymmetric Nash Solution

We propose a new empirical approach to analyzing fiscal decentralization and apply it to Chinese intergovernmental fiscal relationships between the central government and provincial governments. In calculating budgetary revenue and expenditure shares, we include extra budgetary revenue and expenditure. We find that although an increase in either income inequality or real per capita GDP lowers local governmentsf bargaining power within the budgetary system, local governments can offset this by obtaining more bargaining power over extra budgetary expenditures. Another finding is that although urbanization increases provincial governmentsf budgetary revenues, it also restricts the scope for further budgetary expenditure.