Description:
Political institutions are important factors influencing the supply of public goods. This study matches the organizational forms of political power in prefectural cities with data on implicit governmental debts, to examine the effect of political incentives on the size and risk of these debts. Further, it examines how institutional arrangements can lead to a trade-off between incentives and risk control. We measure the organizational form of political power by considering whether the municipal party secretary of a prefecture-level city also serves as the director of the standing committee of the municipal people’s congress (i.e., the concurrent-position-holding system). Empirical results show that this political system has a significant positive correlation with the implicit debts of local governments. The debt-to-GDP ratio of prefecture-level cities following this system have an overshoot of 5%. The impact of the concurrent-position-holding system on governmental debts mainly stems from local governments' allocation of financial resources, and we find no evidence for “bad” governmental behaviors, such as reduced efficiency in fiscal fund usage. The effect of such a system on local public debts is also related to the degree of marketization. First, the positive effect is concentrated in non-standard debts instead of standard municipal investment debts. Second, the degree of regional marketization weakens the debt-growth effect of the concurrent-position-holding system. Third, the impact of this system shows a bell-shaped curve, as the size of debts increases. Debt risk resulting from political incentives can be controlled through a more decentralized fiscal system, a stronger budget law system, and third-party auditing reformation