Decentralization, local information, and effort substitution: Evidence from a subnational decentralization reform in China

Abstract

This study examines whether and how information asymmetry affects local governments' gaming behaviors in a decentralization reform. We contend that adequate access to local information by the principal is a prerequisite for mitigating effort substitution among agents. We examine the hypothesis based on a decentralization reform in China—the Integration of Agriculture‐related Fiscal Transfer reform. We use the distance between pilot villages and the provincial capital as the measurement of local information. Employing a difference‐in‐differences design to scrutinize a unique dataset comprising 85,628 observations spanning 9199 villages from 2011 to 2020, we find that subnational decentralization with information asymmetry leads to increased effort substitution by local governments. Further analysis reveals that more abundant local information can alleviate the extent of effort substitution in reformed villages. Overall, this research highlights the importance of considering local information when designing policies to mitigate performance gaming in public goods provision and support effective subnational decentralization.