On the determinants of public infrastructure spending in Chinese cities: A spatial econometric perspective

In the context of fiscal decentralization, we use cross-sectional data of 242 Chinese cities in 2005 to explore the major factors contributing to the decline of public investment. The main finding is that a city government appears to reduce its own infrastructure spending as a response to the rise of infrastructure spending of its neighboring cities, revealing evidence of positive spillover effects of public infrastructure expenditure. This paper contributes to the existing literature by providing a new perspective for understanding the decline in public investment. In addition, this paper sheds some light on the ongoing debate on the nature of government competition in China and has important implications for policy makers in making fiscal arrangements among government tiers in a decentralized economy.

► A spatial econometric approach is used to explore the determinants of public spending.
► There is evidence of spatial dependence of public spending across China's city governments.
► There is evidence of positive spillover effects of public infrastructure expenditure.