The Fiscal Impact of County-to-Urban District Conversion in China

Abstract

Municipal annexation has been one of the most widely adopted instruments for urban growth in the United States. Scholars of public choice and regional studies have long debated the fiscal effect of local government annexation. Few studies, however, examine the fiscal effect of municipal administrative annexations in China, where prefectural cities have extensively annexed county-level governments through forcefully converting rural counties into urban districts in a top-down manner. Employing a difference-in-differences (DID) method coupled with an event study approach, we analyzed a panel data set of 282 prefectural cities from 2007 to 2015 to examine the fiscal impact of annexation in China. The findings show that prefectural cities have significantly increased their land conveyance fees through administrative annexation. Given that land conveyance fees serve as one of the most important own-source revenues at the local level, our findings shed light on the crucial link among the urbanization process, government reorganization, and local land finance in China and, potentially, in other transition countries.