Title: Borrowing for Glory: How Career Incentives Drive the Growth of Quasi-Municipal Debt in China

Presenter: Prof. Ming Gu. Assistant Professor of Economics 

Discussant: Prof. Gergely Horvath. Associate Professor of Economics

Venue: IB 1056

Time: Feb11, 10am – 11am

Zoom Meeting ID: 755 808 3289

Passcode: 1056

Abstract

Local Government Financing Vehicle (LGFV) bonds are a critical yet controversial instrument for local governments in China to fund infrastructure and urban development. Despite the 2014 Budget Law’s aim to replace off-balance-sheet financing with more transparent bond issuance, LGFV bond issuance has continued to expand post-2015, raising questions about its underlying drivers. While prior research has focused on regulatory factors and economic conditions, the role of political competition among local officials remains underexplored. This study examines how tournament-style competition, where local officials’ career advancements depend on relative performance, influences LGFV bond issuance. Using a panel dataset of city-level officials from 2015 to 2023, we construct within-province mayoral networks to capture peer effects among local leaders. Following previous studies, we quantify political competition intensity as the proximity in mayors’ ex-ante promotion probabilities. Our findings reveal that a mayor’s scale of bond issuance is significantly and positively impacted by the borrowing behavior of rivals within the same province. Borrowing responds strategically to peer pressure at both the beginning and end of officials’ tenures, reflecting early investment incentives as well as the pressure to catch up if promotion has not occurred after a certain number of years in office. Additionally, bond issuance is shaped by the debt left by predecessors, compounding local fiscal challenges. This study contributes to the literature on political competition by highlighting the unintended consequences of tournament-style promotion incentives, specifically the amplification of LGFV bond growth through peer pressure among local officials. These findings offer valuable insights for policymakers seeking to address the fiscal risks associated with local government borrowing while incentivizing sustainable economic growth.