A Game-Theory-Based Interaction Mechanism between Central and Local Governments on Financing Model Selection in China

Abstract

Local financing platforms and (public–private partnerships) PPPs have received extensive attention, but there are few studies on the interaction mechanism of financing model selection. This paper presents a game-theory-based interaction mechanism of local financing platforms and a PPP model based on the government heterogeneity objective function. The study results found that the central government’s tolerance of local governments participating directly in municipal projects with financing platforms or PPP models mainly depends on land price premiums. When the premium is small, the collusion between local governments and financing platforms does not violate the objectives of the central government. Then, local and central governments prefer financing platforms to participate directly in municipal projects. In contrast, the local government prefers the financing platform model when the premium is significant. The central government no longer tolerates the financing platform model and prefers to complete municipal projects with the PPP model. This study believes that promoting the PPP model is a critical way to moderately resolve the debt risk of local government financing platforms and reduce the financial pressure on local governments.