Does flattening government improve economic performance? Evidence from China*

This paper examines a causal relationship between the flattening of a government hierarchy and economic performance by exploiting a panel data set on government reorganization in China from 1995 to 2012. Delayering has led to increases in revenue and inter-governmental transfers for county governments, but the associated enlarged span of control makes it difficult for upper-level governments to coordinate and monitor local ones. This has led to a reduction in county governments' total public expenditure and pro-growth expenditure, as well as an increase in land corruption. Overall, the flattening of the government hierarchy has a negative effect on economic performance.