Intergovernmental Fiscal Transfers and County-Level Education Expenditure in China

Purpose The purpose of the paper is to investigate the impact of various types of intergovernmental fiscal transfers on local public education expenditure at the county level in China and to estimate the leakage of categorical subsidies for rural compulsory education.Design/Approach/Methods It is a quantitative study. The paper constructs a quantile regression model and adopt data collected in 2007 for 1,985 counties in China to examine the impact of relevant fiscal transfers.Findings The results reveal that most intergovernmental fiscal transfers exert a substitution effect on the local education expenditure, whereas subsidies for rural compulsory education from the Central Government have a crowding-out effect on education investments from local financial resources. Although the subsidy program generally narrows the education expenditure disparity across counties, there are heterogeneous effects across different regions.Originality/Value The paper estimates and compares the impact of fiscal transfers on both the level and disparity of local public education in different regions, and provides a possible explanation for the crowding-out effect of fiscal transfers in China.