Local Government Debt, Sectoral Linkage and Resource Allocation Efficiency

Abstract Increasing the efficiency of resource allocation is the basis and guarantee for boosting high-quality economic development. Based on the panel data of Chinese industrial enterprises and cities from 2008 to 2013, this paper studies the influence of infrastructure construction demand shocks represented by local government debt expansion on the efficiency of sectoral resource allocation from the perspective of sectoral linkage. According to the empirical findings, local government debt significantly reduces the resource allocation efficiency of manufacturing sector that is highly related to infrastructure construction. This conclusion is still tenable after the robustness test using the simulated local government debt as an instrumental variable. Further mechanism tests show that there are two reasons for the decline of the efficiency of resource allocation in manufacturing sector that is highly related to infrastructure construction. First, more product demands and investments brought by the expansion of local government debt flow to less productive enterprises in the sector. Second, resource misallocation reduces the probability of high-productivity enterprises entering the market and low-productivity enterprises exiting the market, and the effect is more prominent in cities with high dependence on state-owned enterprises and high pressure on officials to be promoted. According to this study, the performance management of local government debt should be further strengthened, and particular attention should be paid to the influence of local government debt on enterprise investment and financing crowding out and resource misallocation.