@article{Government:6490,
      recid = {6490},
      author = {Su, Yang},
      title = {Local Government Financial Constraint and Spending  Multiplier in China},
      publisher = {University of Chicago},
      school = {Ph.D.},
      address = {2023-06},
      abstract = {I estimate the annual local government spending multiplier  to range from 2.22 to 0.72 and the accumulated multiplier,  which is the total increase of local output per 1 RMB  increase of local government spending during 2001-2019, to  be 11.8 at the prefecture city level in China, where  government spending is known to have a significant impact  on the supply side of the local economy. To achieve  identification, I construct a novel instrument for local  government spending: the fraction of unoccupied raw land in  the downtown area in 2000. After 2000, as local governments  increasingly rely on land sale revenues to finance  expenditures, a higher fraction of unoccupied urban land is  associated with less land requisition, which requires  compensation to displaced occupants, and hence higher  profits from land sales for local governments. Moreover,  the fraction of raw land is orthogonal to a rich set of  city fundamentals in 2000 thanks to the inefficient  utilization of urban land before 2000. The multiplier is  found to be significantly larger in cities where the local  governments have smaller debt capacity and where the  private capital is more mobile. Quantitatively, the  crowding-in of private inputs following government spending  - such as labor and capital - can explain over 70% of the  output increase. At the firm level, government spending is  found to improve local productivity and market access, and  attract more firm entry. I also find significant and  positive spillover effects of local government spending  within each city. Overall, the paper highlights the  macroeconomic importance of government spending targeting  the supply side of the economy.},
      url = {http://knowledge.uchicago.edu/record/6490},
      doi = {https://doi.org/10.6082/uchicago.6490},
}