Previous studies suggest that the fiscal incentives of local governments have profound economic implications, but few studies have provided firm-level evidence on the channels through which the changes in the fiscal incentives of local governments can affect firms. In this thesis, I explore the effects of changes in local governments’ fiscal incentives on firms’ behavior in the context of China. To address the endogeneity problem, I adopt a simulated instrumental variable (SIV) approach that exploits the exogenous changes in the local governments’ enterprise income tax retention rates. My findings show that a reduction in the fiscal revenue retention rates motivated the local governments' to strengthen their taxation enforcement and that this, in turn, resulted in an increase in the ent...[ Read more ]

Previous studies suggest that the fiscal incentives of local governments have profound economic implications, but few studies have provided firm-level evidence on the channels through which the changes in the fiscal incentives of local governments can affect firms. In this thesis, I explore the effects of changes in local governments’ fiscal incentives on firms’ behavior in the context of China. To address the endogeneity problem, I adopt a simulated instrumental variable (SIV) approach that exploits the exogenous changes in the local governments’ enterprise income tax retention rates. My findings show that a reduction in the fiscal revenue retention rates motivated the local governments' to strengthen their taxation enforcement and that this, in turn, resulted in an increase in the enterprise tax burden. I also find that fewer firms entered or exited areas that experienced an increased tax burden, which suggests that the market became less competitive.

Key Words: Fiscal Incentive, Enterprise Income Tax, Tax Burden, Local Governments, Simulated Instrumental Variable, Firms’ Entry and Exit, Market Concentration