The welfare effects of fiscal decentralization: a simple model and evidence from China

This study extends the model of three levels of government to two levels, namely, the central government and local government, and uses the Hamilton function method to explore the dynamic relationship between fiscal decentralization and social welfare level. The study uses numerical simulation, results of which reveal that fiscal decentralization and social welfare display an inverse U-shaped relationship. The study also uses China’s panel data to perform an empirical investigation. Our findings demonstrate empirical results that verify the correctness of the theoretical results. This study also analyzes the regional differences in the relationship between fiscal decentralization and social welfare and demonstrates that fiscal decentralization and social welfare have an inverse U-shaped relationship in the eastern, central, and western areas of China, but they still present regional differences. Finally, policies and recommendations are proposed. © 2018, Springer Science+Business Media B.V., part of Springer Nature.