How Public Service Investment Affects Public Incomes: Evidence from Shanghai, China

Abstract

The fiscal incentive of public investment has a profound impact on the behavior of local governments. This paper uses Shanghai, China, as a case study to explore the fiscal incentive mechanism of public service investment through heterogeneity analysis and mechanism analysis, utilizing district data from 2005 to 2016. The results reveal three key findings. First, the incentive mechanism of public investment is different between budgetary revenue (BR) and land transferring fee (LTF). The incentive effect on BR is driven by the amount of public investment rather than the quality of public service delivery, failing to effectively motivate local governments to consistently improve public service quality. Second, while the fiscal incentive effects of public investment in central districts rely more on BR, suburban districts are more dependent on land finance. The high dependence on land finance makes local governments tend to pay more attention to the needs of the companies rather than citizens. Third, the proportion of the migrant population and fiscal stress weaken the association between public investment, BR, and LTF but strengthen the link between the quality of public service delivery and LTF. Conversely, the existing stock of public service resources has the opposite effect.