Transfer Payments and Regional Total Factor Productivity: Evidence From China

Abstract

Through theoretical analysis and empirical test, the following conclusions are drawn: Firstly, the benchmark test proves that transfer payments (TPs) significantly promote regional TFP. Secondly, the conclusions of this paper are still valid after using the system GMM model and instrumental variable method to deal with the endogeneity problem. Thirdly, heterogeneity analysis shows that TPs have a greater impact on TFP in the central and western regions, and general TPs and special TPs significantly promote regional TFP. Fourthly, mechanism analysis shows that TPs promote regional TFP through two channels: narrowing the financial gap between local governments and reducing the vertical fiscal imbalance between central and local governments. Because the balanced distribution of financial resources means the effective supply of public goods, all regions have the conditions to optimize the allocation of resources and improve the efficiency of resource use. Based on this, it is still necessary to implement the TPs system. Also, there is a need to optimize the TP rules.