Fiscal Decentralization and Life Satisfaction: Evidence from Urban China

The impact of government structure on citizen welfare remains an open question. This study uses a repeated cross-section data (China General Social Survey) of Chinese urban households to test the hypothesis that fiscal decentralization increases individual welfare. The data used were collected in 2003, 2005 and 2006 and covered most of the provinces in China. We construct two measures of fiscal decentralization: one is based on revenue and the other on expenditure. Then we apply ordered Probit regression to investigate the impact of decentralization on individual life satisfaction after controlling a rich set of individual characteristics and several important macroeconomic factors. We find that greater revenue decentralization increases life satisfaction, a finding that is quite robust across different specifications. We also find that revenue decentralization is more important to the underdeveloped western region, the private sector employees and homeowners. In terms of income distribution, both the rich and the poor gain from revenue decentralization.