Does Flattening Government Improve Economic Performance?

Abstract

In this paper, we examine a causal relationship between flattening of a government hierarchy and economic performance. Exploiting a novel panel dataset on government reorganization in China from 1999 to 2012, we find that delayering has led to increases in revenue and inter-govermental transfers for county governments. However, the associated enlarged span of control of the upper-level governments, has led to a reduction in county government's total public expenditure and pro-growth expenditure. Overall, the flattening of the government hierarchy has a negative effect on economic performance.