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Centralization and regional development: Evidence from a political hierarchy reform to create cities in china

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  • Bo, Shiyu
Abstract
How does centralization or decentralization in government affect regional development? This paper draws upon a quasi-natural experiment in China’s political hierarchy from the 1980s to investigate the effects of centralization in a novel sub-provincial setting. In this political hierarchy reform, China created “cities” from groups of rural counties and centralized counties’ political powers to the newly established city governments. Using a difference-in-differences approach, I show that centralization has positive causal effects on industrial productivity within the created cities. My analysis of industrial firm-level data reveals a reduction in the dispersion of marginal products, suggesting that centralization will help to reduce regional resource misallocation and improve aggregate productivity. A decomposition exercise shows that the gains are mainly contributed by extensive margin from entry and exit. I quantify the loss in productivity under decentralization by hypothetically reallocating inputs to equalize marginal products to the extent observed in centralization. Finally, he reform increases the concentration and specialization of production in space.

Suggested Citation

  • Bo, Shiyu, 2020. "Centralization and regional development: Evidence from a political hierarchy reform to create cities in china," Journal of Urban Economics, Elsevier, vol. 115(C).
    • Handle: RePEc:eee:juecon:v:115:y:2020:i:c:s0094119019300518
    DOI: 10.1016/j.jue.2019.06.005
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    More about this item

    Keywords

    Decentralization; Political hierarchy; Misallocation; City creation; Productivity;
    All these keywords.

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism
    • O18 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Urban, Rural, Regional, and Transportation Analysis; Housing; Infrastructure
    • P25 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Urban, Rural, and Regional Economics
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R58 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Regional Development Planning and Policy

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