Local information and the stabilization role of local government: Evidence from a natural experiment in China
利用中国所得税分享改革这一自然实验，检验了地方政府的稳定作用，发现地方政府规模有稳定效应，但纵向财政失衡会削弱该效应，而缺乏地方信息是关键原因。
Abstract Oates, (1972) argues that local governments cannot use conventional policies to stabilize economies, due to fiscal spillovers and beggar‐thy‐neighbor policies. Hayek's theory implies it is efficient for a central government to devolve decision‐making authority to local governments that have informational advantages. This paper tests the different theoretical implications by examining a natural experiment caused by the income‐tax‐sharing reform in China. Our analysis reveals that local government size does have a stabilization effect, but vertical fiscal imbalance (VFI) substantially weakens this stabilizing effect; lack of local information is the key factor leading to this influence of VFI.