The grand bargain on local government debt: Evidence from China's intergovernmental relations

This article provides a deeper understanding of policy implementation in local government, highlighting the key role of subnational governments in public risk governance. In fiscally centralized countries with significant local government debt problems, officials at the central government level cannot effectively mitigate local government debt risks solely through restrictive financing policies. The authors explain why policy-makers at the central government level in these countries need to revaluate the structure of the local government financial system. This article uses Rubinstein's bargaining theoretical framework to explore the link between intergovernmental relations and levels of local government debt. Utilizing the two-tier bilateral stochastic frontier method on provincial and Chinese municipal data from 2013 to 2021, the authors assess the impact of relative bargaining power on local government debt risk governance. The local government debt risk formation process is shown to be the consequence of the central government's concession, and is affected by dynamic economic conditions.