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Strategic Interaction in Urban Infrastructure Finance

A Spatial Panel Econometric Analysis of Chinese Prefecture-Level Cities

Can Chen, Kenneth A. Kriz, and Shuanglin Lin

October 2020, English

This research represents one of the first attempts to empirically examine strategic interaction in urban infrastructure expenditures on capital construction and maintenance in China. Drawing upon the theories of strategic interaction, this study further disentangles the sources of strategic interaction in urban infrastructure finance based on a spatial panel data consisting of 277 prefecture-level cities from the years of 2001 to 2012. The empirical findings confirm that city infrastructure expenditures are significantly and positively affected by the action of neighboring cities.  By decomposing urban infrastructure expenditures, we reveal that the positive effect of strategic interaction is stronger in the spending category of infrastructure capital investment than that of infrastructure maintenance expenditure. In addition, cities in the eastern regions react more strongly to their neighboring cities’ infrastructure capital investment than those in the middle region. Strategic interaction in the spending category of urban infrastructure maintenance only occurs cities in the middle regions. Finally, Chinese cities react more strongly to the total infrastructure investment of their neighboring cities either one year prior to and during the Provincial Communist Party Congress (PCRC) or the year after a city’s party secretary takes office. These findings are largely consistent with the yardstick competition literature, which states that upper-level policymakers or local citizens place extra weight on policies and outcomes in the neighboring jurisdictions when evaluating a jurisdiction’s performances.


Economic Development, Economics, Local Government, Public Finance, Urban Development