Fiscal Decentralization and Local Government Size in Chinese Prefecture-Level Cities: Does Fiscal Transparency Matter?

Abstract

Fiscal transparency strengthens accountability mechanisms through mitigating information asym­metry, probably moderating the effect of fiscal de­centralization on local government size. Using data from 283 Chinese prefecture-level cities, this study tests the hypothesis with the Generalized Method of Moments (GMM) estimator. We find that fiscal de­centralization expands local government size under low transparency, but this positive effect weakens as transparency improves and becomes insignifi­cant beyond a threshold. Vertical balance, reflecting reliance on own-source revenue, initially increases government size, but this effect diminishes with higher fiscal transparency and turns negative at higher transparency levels. These findings reveal that the common-pool hypothesis holds condition­ally, suggesting that fiscal transparency is critical to ensure that fiscal decentralization promotes effi­cient public resource allocation.