Plugging the gap: Debt pressure and the rise of forfeiture revenues in local governments

This paper examines the impact of local government debt pressures on the confiscation of forfeiture revenues in China. Using a comprehensive panel dataset of Chinese cities for the period 2016-2021, we find that higher debt pressures are associated with significantly greater reliance on confiscation of forfeiture revenues. The results are robust to addressing endogeneity concerns, using small river density as a shift-share type instrument variable. Our findings suggest that fiscally stressed local governments may resort to informal confiscation of forfeiture revenues to compensate for revenue shortfalls. This substitution behavior is more pronounced in regions with higher levels of hidden debt and poorer oversight. Overall, our study highlights the need to monitor the growth of informal revenues when assessing debt sustainability.