Local government fiscal stress and regional entrepreneurship: Evidence from a natural experiment in China

Abstract

Employing the abolition of the agricultural taxes in 2005 in China as a natural experiment, this paper investigates the impact of local government fiscal stress on regional entrepreneurship. We find that the reform results in increased fiscal expenditure and decreased new firm entry. This result suggests that local government fiscal stress is a significant hindrance to regional entrepreneurship, particularly in areas with low fiscal self-sufficiency, limited financial development, and weak legal systems. We also explore the mechanisms through which agricultural tax abolition affects entrepreneurial activities. Our findings indicate that four mechanisms are effective in influencing entrepreneurship, including enhanced tax collection and management, increased local debt, rising land prices, and heightened uncertainty perception by entrepreneurs. Overall, our research provides new insights into the relationship between local fiscal stress and economic development from the perspective of regional entrepreneurship.